Reduced rate VAT

[pjclar02]

Hello

I may be showing my ignorance of VAT here but have a query on the 5% reduced rate of VAT for conversion of a house into two flats.

My client is looking to undertake such a venture in his own name as a non-VAT registered individual. He will do the majority of the work himself. However, he is also the sole director and shareholder of a VAT registered limited company. My question is this....

If he, individualy, purchases say £50,000 worth of materials for the conversion, he will incur £10,000 VAT (assuming all materials are standard rated). This VAT will be lost if he is undertaking the work himself.

Can the limited company be contracted to undertake the work? The company can then recover the £10,000 VAT incurred on the materials. The company would then recharge the gross material cost (£60,000) plus a nominal labour charge of say £5,000 to the director. Am I correct in thinking that this would then be a reduced rate supply and the the company would only need to charge the director 5% VAT on the £65,000 charge? Therefore, the overall VAT cost would be £3,250 instead of £10,000.

I'm sure I am missing something fundamental here, but can't see what it is. If it is relevant, the company does not operate as a building contractor - it is a furniture designer.

Any thoughts on this would be very welcome.

Many thanks

Paul

[section 44]

a nominal labour charge of say £5,000

If the company's charge is not arm's length then the arrangements may be seen as abusive (Weald Leasing would be worth a read) for VAT purposes.

Presumably the company would pay corporation tax on its profit.