I have recently had a couple of construction sector clients with routine enquiries from HMRC into their VAT affairs, and these enquiries have proved to be rather drawnout and time consuming.

One specific issue taken up was whether our clients were working on new build residential or commercial buildings, and our clients were required to submit detailed evidence, including contracts, drawings and building plans in order to demonstrate the VAT treatment they had adopted. With the enquiries going back up to 6 years this involved retrieving a number of files from archive storage, as well as taking up a considerable amount of employee and directors time.

For contracts that had a split of residential and commercial, generally blocks of residential flats with communal areas (gyms, shops etc), this was more involved in order to back-up the split between residential and commercial work. These enquiries have highlighted the need to:

1. Keep detailed files for each contract worked on.
2. Ensure a good system of archiving and consider electronic filing for easy access.
3. At the outset of each contract carry out a thorough review of the VAT position. This should be documented on the contract file, and if additional evidence or confirmation of the VAT treatment is obtained from the main contractor ensure this is kept.
4. If there are contracts with a mix of residential and commercial work then the calculations and method of apportionment need to retained, and this will need to be reviewed during the duration of the contract, as any contract amendments are agreed.

The above has also highlighted how important point (3) above is so that at the outset of the contract the correct VAT treatment is adopted, and if you are also employing your own sub-contractors then you ensure they also adopt the correct VAT treatment. The risk is if your sub-contractors charge you VAT incorrectly on residential new build work that you are then blocked from claiming this input VAT, and so may have overpaid your suppliers. While in theory you could reclaim this from your client, in practice this may be more difficult.

Written by Ben Bradley