Reduced VAT - Paying a third party

[swood92]

Hi there, I am new to this site and I am hoping to get some help and advice. I am a builder and I have been asked to carry out a small extension to a residential property. The owner has recently advised prior to us starting, that their business friend will be paying for the work and I will need to invoice him instead of the owner. They have an agreement between themselves due to our customer lending money to the third party payer and now that they have the money to pay back, and have agreed to pay for the work. The third party payer is VAT registered, and I have been told on my invoices, I will need to charge 5% VAT instead of the standard 20% for materials and labour. I have done jobs based on the reduced rate before and the properties have met the reduced rate criteria and i have invoiced the owners direct, so this has not been a problem, so I pretty much know how it works but this has set me a bit of track. They have told me they can provide me with evidence and information required to show that I can charge 5% but does this sound right? Obviously we still need to pay our suppliers and trades the standard 20% prior to claiming anything back in our return, so I don't want to get stung by going ahead with what has been said. The other thing would be is the VAT reverse. Our clients are usually not VAT registered but if this third party is, surely they would become involved in the reverse flow?? Has anyone been asked this before that can shed any light on what I need to do?

 

[David Griffiths]

I'd avoid it like the plague, and I'd say that in any situation where you are asked to raise an invoice to a third party for work. If you do go ahead you would need to get formal instructions from the payer so that they become your customer. I'd also make it clear on the invoice the specific address that the work is carried out, rather than provide a generic invoice for building works addressed to the company. I'd make that clear to the paying party before accepting instructions in case they have other ideas

I'd also want to be quite certain that th 5% rate applies - if you get that wrong then HMRC will be after you for the difference. At first sight it's difficult to see how it does apply to an extension of an existing home.

I've no direct experience of the domestic reverse charge so can't help with that but the whole set up looks highly suspect so back to me first comment

 

[Ziggy2024]

5% is for conversion to a different type of dwelling usually. Ask for evidence then make the decision whether to go ahead.

Reverse charge would only apply if the customer (the third party in this case) is CIS registered so you need to check that.

I agree with the skepticism of David though. Make sure everything is watertight from your side if you do decide to go ahead. Cover yourself!!

 

[Paul Kelly ICHYB]

I would only do this if the client put it in writing that the third party was to pay (and if they didn't within x days, they would be liable) and the third party put it in writing that they would pay all invoices for the client.

As for the VAT, charge 20%. 5% or 20%, it will be offset in the third parties returns.

Bottom lne is that I probably wouldn't do it at all - it is a way of creating issues and not getting paid at all!

 

[Ziggy2024]

As for the VAT, charge 20%. 5% or 20%, it will be offset in the third parties returns.

Just to note that if output VAT is incorrectly charged then it effectively ceases to be valid VAT. It has to be correctly charged by the supplier for the customer to reclaim any input VAT.

 

[DWS]

Just to note that if output VAT is incorrectly charged then it effectively ceases to be valid VAT. It has to be correctly charged by the supplier for the customer to reclaim any input VAT.

Agree with this, and also surely the third party must then charge VAT to the homeowner so where is there any VAT advantage in doing things this way?
The third party should repay the homeowner and the homeowner should pay the builders.

 

[Bobbo]

I would only issue an invoice in the name of the property owner. This third party can then pay that invoice directly to you in settlement of amounts they happen to owe to [property owner].

Obviously satisfy yourself as to whether the reduced rating actually applies - if you get that wrong it will be on you, not the customer - regardless of what they have told you.

 

[Paul Kelly ICHYB]

Should have asked, is @swood92 registered for VAT?

@Ziggy2024 if the OP has been charged 20%, why couldn't they charge out at 20%? The issue is if they charge 5% and it should be 20%! Also, a simple extension probably wouldn't meet the relevant 5% criteria.

 

[Bobbo]

Agree with this, and also surely the third party must then charge VAT to the homeowner so where is there any VAT advantage in doing things this way?

It sounds like the intention is simply that the third party will pay the invoice (possibly incorrectly recovering the VAT along the way) and treat that as a repayment of amounts owed to the homeowner, i.e. no invoice or anything from third party to homeowner.

 

[Ziggy2024]

Should have asked, is @swood92 registered for VAT?

@Ziggy2024 if the OP has been charged 20%, why couldn't they charge out at 20%? The issue is if they charge 5% and it should be 20%! Also, a simple extension probably wouldn't meet the relevant 5% criteria.

The VAT you must charge on your supplies is dictated by what you are supplying, not what you have purchased.

We don't have enough information (even the OP) to say that the 5% does or doesn't apply.

 

[DWS]

It sounds like the intention is simply that the third party will pay the invoice (possibly incorrectly recovering the VAT along the way) and treat that as a repayment of amounts owed to the homeowner, i.e. no invoice or anything from third party to homeowner.

The third party is perfectly entitled to pay the invoice, it does not mean that the invoice has to be made out to them.
If homeowner and third party insist that invoice is made out to third party then this potentially becomes VAT fraud, or why else is this scenario being suggested?