Should Contractors ask Clients to Pay for Materials? – Financial and Legal Risks
Although it may at first sight appear to be the same topic as Customer Supplying Materials, (see article in Paving Site Online Insights) this is an altogether different subject although relating to the same thing i.e. reducing financial outlay on behalf of the Contractor by arranging for materials to be on site for use by the contractor.
For this article, I am presuming that the contractor is not registered for Value Added Tax.
Taking the usual scenario of a landscaper designing a project, and arriving at a price to undertake the works from start to finish, we need to look at the financial implications of this subject. A standard straightforward quotation to build a garden or garden feature is provided to the customer. The total quoted cost is (say) £20,000.00 plus VAT on materials. The material content of the quotation is (say) £10,000.00 plus Value Added Tax on the materials.
The landscaper is not registered for VAT and therefore cannot reclaim the tax payable on the materials, and therefore the quotation is now £22,000.00 representing £10,000.00 non-VAT labour and £10,000.00 plus 20% (current rate) VAT = £2,000.00 total £22,000.00.
Dealing with the VAT Man
For the purposes of HM Customs and Excise – The VAT man – the landscaper is the end user of those materials and they will charge the tax accordingly, payable at source by the landscaper. If the landscaper is not registered for VAT, they cannot reclaim any of the £2,000.00 VAT charged by the supplier.
The VAT content on the sale is paid by the landscaper to the Supplier/Merchant, and the Landscaper has no choice but to pay the tax and charge it to the customer. Thus, the material price on the project is £12,000.00, the VAT element value of which is now added to the turnover figure of the Landscaper.
Legally, the landscaper must register for VAT when taxable turnover (the total of all sales including VAT) exceeds the threshold (currently £90,000.00) within a 12 month rolling period, or if they expect their taxable turnover to exceed the threshold in a single thirty day period.
All of this information is available from HMRC and should be subject to constant review as the threshold may vary.
I fully appreciate the reasoning behind requesting that the customer purchase expensive materials for and on behalf of the contractor, even if only to delay the time when total sales exceed the threshold and the contractor is obliged to register for, and charge VAT to their clients, although it is all part and parcel of running a growing and successful business!
Implications for Terms and Conditions
Assuming that the Landscaper has followed due protocol regarding their Standard Terms and Conditions, mention will have been made regarding terms of payment, including a schedule of periods, dates and times during the lifetime of the project, written at the time of producing the quotation.
Mention will probably not have been made in those Standard T & Cs to the customer paying in advance for the materials required for the landscape build, and that all other Terms will relate to matters such as warranties, site working times and conditions and those matters that comprise of the complete quotation foundation.
Variations in the Original Quotation
Any variation in those Terms and Conditions – written and produced by the Contractor as part of the quotation process, may become null and void if a fundamental element is changed, i.e. responsibility for payment of materials.
In other words, if the contractor has not mentioned that they will require the customer to pay for materials on their behalf, that may constitute a breach of contract, or at least become a variation order.
In the event of any dispute at any time during the course of a project – or even years later in some cases, where a scheme fails for whatever reason – and the garden becomes subject to a claim or counterclaim between the customer and the landscaper, the question of materials becomes a difficult knot to unravel if the customer has purchased them on behalf of the landscaper.
Selecting Materials – Responsibilities
At the time of arranging the product schedule/materials list for the job, the landscaper, by nominating the materials, their colours, sizes, product titles, amounts etc, is taking on the role of consultant, which, under the Construction (Design Management) Regulations 2015 would likely be construed as being the Principal Designer of the project (even if there was another Designer involved) at that initial stage in the project development.
To examine this matter more closely; the customer, having purchased the materials, is now the end user, having paid the tax on them. The customer is now the owner of those products. Assuming that the landscaper/consultant has allowed for wastage in the normal way, those additional materials now belong to the customer, and they have the right to retain anything left at the end of the job. The landscaper has now lost any additional profit that may have been available at the end of the work by selling on those unused materials.
Low of Profit Making Opportunities
The landscaper has also lost any profit that would have been made on marking up the materials, if only to compensate for the time taken in arranging them in the first instance, plus any other time spent providing samples and specimens. The landscaper is now on a labour only contract to all intents and purposes, having lost all opportunity to make a genuine business-like profit, which is the normal reason for becoming a contractor in the first place.
Loss of Profit Whilst Retaining Responsibility for Material Selection
By nominating the products, the landscaper is now responsible for their suitability for use on the project, without any financial benefit whatsoever. They have spent unpaid time sourcing and arranging them to site, and have no right to any excess product at the end of the job as they will not have paid for anything.
In my work as a Disputes Expert Witness, I do not often become directly involved in matters of finance, as they are normally outside of my remit, which is primarily quality based, or deciding technical issues, but I see the complicated permutations and problems that arise whenever a Contractor decides to ask the customer to pay directly for materials. Product suitability, when a scheme fails, and becomes a case for litigation is fraught with difficulties for both Parties, but especially for the Contractor, who cannot escape liability and responsibility simply because the customer bought the materials.
Keeping Control of a Project
And all because the contractor was trying to reduce their turnover by circumventing the rules on Value Added Tax. Invariably too, such cases are referred onwards by the Court to HM Customs and Excise, and a visit by the VAT man follows in short order.
It is important to try and keep all matters of contract as clean and easily understood as possible. Once convoluted, they can become very difficult to untangle!
To summarise, if a contractor asks the customer to pay for the materials for whatever reason they not only lose any profit they should have been entitled to as a professional contractor, but remain liable for material selection as the specifier (designer) without any benefit.
Better by far, welcome the fact that you have become successful enough to breach the VAT threshold, and if you do need money to purchase materials in advance, use the payment method of requesting a Mobilisation Payment (not a deposit, which may be repayable) to cover that outlay.
