You need some improvements made to your business’s infrastructure, but you’ll be contracting individual workers as their rates are more affordable. However, they are not registered for VAT which means you could be paying hidden VAT which would surge your expenses. Is there a way to reclaim it?
With the rising inflation rate, businesses are eager to cut down costs. Making sure that your venture is reimbursed the amount of VAT it has spent is crucial to make that happen. This includes reclaiming hidden VAT.
VAT is applied to every part of the supply chain. This indicates the value of a product or service is directly proportional to the increase in VAT. Although, every contractor part of the supply chain can reclaim the VAT they have paid except if they are unregistered. If you’re the final customer buying the product or availing of the service, then the hidden VAT will be applied to you by being added to the price you pay.Example 1. XYZ Ltd hires Patrick, a sole trader, to retile and repaint the reception area in its office. Patrick is a sole trader who is quite positively reviewed, but the catch is he’s unregistered for VAT. Patrick bills XYZ Ltd £10,000 for his services which includes materials worth £5,000 (including the VAT of £700). Patrick not being VAT registered means XYZ Ltd can’t reclaim the £700 VAT even if Patrick mentions it separately on the bill. Therefore, if XYZ Ltd had contracted a VAT registered individual it wouldn’t have had to bear the £700 VAT.
XYZ Ltd could hire a registered contractor which means it could reclaim the VAT payable on the total invoice, although that doesn’t ensure a cheaper job done because higher charges could be quoted for the work.Tip. When making comparisons between contractors, be sure to determine if they are VAT registered or not. To get the correct idea of the price you will be paying at the end, you should compare the total price offered by unregistered contractors vs. the net VAT cost set by registered contractors.
If the price you incur by hiring an unregistered contractor is more affordable, and therefore, you end up contracting him, there’s a chance to reclaim the hidden VAT on those services.Example 2. The facts are the same as in Example 1, but XYZ Ltd works out different terms. XYZ Ltd will purchase the materials suggested by Patrick (£5,000 plus £700 VAT). Therefore, Patrick will no longer be charging for the supplies included in his original offer, and his final bill would come down to £5,000. XYZ Ltd will reclaim the £700 VAT which would result in the total cost coming down from £10,000 to £9,300. Patrick doesn’t incur a loss either because his profit remains the same as before.
XYZ Ltd can still delegate the responsibility of ordering and receiving the supplies required for the project to Patrick, on the basis that this is compensated for in his £5,000 bill. Although for VAT reclaim, it is imperative that in the paperwork the transaction for the supplies is shown between XYZ Ltd and the supplier.
