Housing Association Sector: Insolvent contractors

We have recently heard of another building contractor to the Housing Association sector going into administration.  Sadly, this is not the first time this has happened and whilst there will be a number of issues to resolve, particularly where the contractor was in the middle of a project, VAT needs to be added to the list.

Where the contractor was building dwellings, the construction is usually zero rated for VAT.  If Contractor A goes bust and Contractor B takes over before the dwellings are completed, Contractor B is still constructing the building and can also zero rate their construction services.  However, VAT costs could be an issue in the following examples

• Contractor A goes bust after the certificate of completion for the houses has been issued.  Contractor B is brought in to deal with issues such as snagging, soft landscaping etc.  Contractor B did not have a contract to build new houses so his services are standard rated for VAT
• Contractor A goes bust prior to practical completion but the HA uses its own workforce to complete the build/fit out.   There is no VAT implication on the wages and salaries of the HA’s own employees.  However, if the HA procures goods to complete the work, say from a builder’s merchant, the goods will be standard rated for VAT. 

In either case, if the houses are for rental, the VAT will not be recoverable so the HA will have incurred an unexpected 20% VAT cost. 

Where a certificate has been issued to Contractor A to certify use for a “relevant residential purpose” or “relevant charitable purpose” (for VAT zero rating purposes) the certificate may need to be reissued to Contractor B.

If you have any queries concerning the VAT implications of dealing with insolvent contractors, please contact Julie Rawlinson-Smith on julie.rawlinsonsmith@centurionvat.com or 07805 134091