October 29th, 2012 / Insight posted in

Supplier demands back dated VAT

VJ writes: I entered into a contract with a sole practitioner architect. I paid him £6,000 plus local authority fees of £3,015. These payments were made in early 2010 but I have now received a demand for more than £1,000 in VAT. The architect was not VAT registered at the time we made the contract but he subsequently became VAT registered with effect from September 2008, which precedes my contract. Must I pay this VAT, given that he was not VAT registered when the contract was made?

Your architect became VAT registered in 2010 but set a start date of July 2008, writes Adrian Houstoun, VAT partner at Kingston Smith. It is likely he had to register from that date because his supplies exceeded the VAT threshold in 2008 but he failed to register at the time. This means he would have to pay HM Revenue & Customs the VAT on all his taxable supplies from that earlier date, which includes the fees he charged you. As you can imagine, he will be substantially out of pocket unless he collects the VAT from his clients. This explains the new VAT bill. 

Whether he is entitled to do this depends on the terms of your contract. VAT law states that if a contract between the parties is silent on VAT, and the consideration is wholly in money, then your payment is inclusive of VAT. So if your contract makes no mention of VAT, as you suggest, you should not be liable for this extra payment. 

From the trader’s perspective, even if you are not registered for VAT, it is better to make clear that your price is exclusive of VAT. That way, if something like this happens, you are in a stronger position with your clients to recoup the money.