VAT - 31.05.2022

Reclaiming hidden VAT on supplies

VAT is a cost

With inflation galloping everyone’s keen to keep costs down. Ensuring that your business reclaims all the VAT it’s entitled to is part of that equation. This includes VAT you might not realise you’re paying.

Added value equals more VAT

VAT is chargeable at each link in a supply chain. This means that as the value of a product or service increases so does the amount of VAT. However, each interim supplier can reclaim the VAT they are charged unless they are not registered. If you’re next in the supply chain (or the final customer) you’ll bear the cost of this hidden in the price you pay.

Example 1. Acom Ltd contracts with Johan, a sole trader, to refit and redecorate the WCs in its offices. Johan is a sole trader that comes highly recommended but is not VAT registered. Johan’s quote is £9,600 and includes the cost of the plumbing supplies (without any mark-up), tiles etc. of £3,600 (including VAT of £600). Johan passes this cost to Acom as part of his bill. Acom isn’t entitled to reclaim the £600 VAT even if Johan itemises it separately on his invoice. By contrast, had Acom used a registered trader it could have reclaimed the £600.

Net cost comparison

Acom could of course use a registered plumber which would entitle it to reclaim the VAT it pays on the entire bill but this won’t necessarily make the job cheaper as higher rates might be charged for the services.

Tip. When comparing quotes for goods or services remember to check if the suppliers are VAT registered. To get a proper price comparison you must compare the full price quoted by those unregistered against the net of VAT price quoted by registered businesses.

Reclaiming the hidden VAT

If you’re using an unregistered supplier for services which include goods, as in Example 1, there’s an opportunity to reclaim the hidden VAT on those goods.

Example 2. The facts are the same as Example 1 but Acom negotiates the following terms. It will source and pay for the materials recommended by Johan (£3,000 plus £600 VAT). Johan will charge for his services plus any mark-up on the goods included his original quote, that is to say £6,000. Acom reclaims the VAT on the materials meaning that the total cost of the job is £9,000 instead of £9,600. Johan is no worse off as he makes the same gross profits from the job as he would have done based on the price he first quoted.

Tip. In Example 2 Acom can still make arrangements with Johan so that he orders and collects the goods he’ll need for the job, on the basis that the price he charges is included in his £6,000 bill. However, it’s important that the purchase transaction for the goods must be direct between the supplier and Acom. This will also mean that the paperwork will show Acom as the customer.

For detailed commentary on entitlement to reclaim VAT on purchases, visit https://www.tips-and-advice.co.uk , Download Zone, year 22, issue 17.