Value added tax in pricing

In the case of Lancaster-v- Bird, the Court of Appeal had to consider whether, in the absence of clear words in the contract, a contract price would be regarded as inclusive or exclusive of Value added tax.

This is not an uncommon problem. If properly handled, construction contracts and professional services agreements will generally make clear whether the contract amount is to attract Value added tax or otherwise. Occasionally however the contract is silent on the matter.

In early 1999 I reported in Contract Journal the case of Tony Cox (Dismantlers) Ltd-v- Jim 5 Ltd in which this question was also raised. Cox was a demolition specialist that had entered into a contract with Jim 5, whereby Cox would transfer development land and carry out certain building works for a contract price of £800,000. The agreement made no mention of VAT. Disputes arose and among other matters the question of whether VAT should be paid on the contract amount was put before the court.

Jim 5 was adamant that the contract price of £800,000 was to be taken as inclusive of VAT. This, it said, was the only proper interpretation that could be placed on the Value Added Tax Act 1994. Cox argued that regardless of how the Act was to be interpreted, this should be overridden by a custom in the construction industry that prices quoted are always exclusive of VAT.

An expert quantity surveyor was called on behalf of Cox who said that in his experience construction contracts are almost always quoted exclusive of VAT and there is a general understanding in the industry that VAT will be charged for and paid in addition to the principle sum. He noted that both parties were registered for VAT and in those circumstances in his experience they would think, estimate, negotiate and reach agreement for sums exclusive of VAT.

His Honour Judge Bowsher QC agreed with Cox. He held that it was the custom within the construction industry to quote prices that are exclusive of VAT. He held that the custom was notorious (in the sense that it is well known to all who deal in the market or trade), certain, reasonable and not contrary to law.

Judge Bowsher clarified however that the custom relied on was a custom between those habitually involved in the construction industry. It was not a custom between builders and individuals outside the construction industry.

Accordingly the case was to be distinguished from the 1993 case of Franks and Collingwood -v-Gates, which established that where the employer was a consumer and he or she accepted a quote for building work that made no mention of VAT, then it was likely that VAT would be treated as included in the price.

In the more recent case of Lancaster-v-Bird the Court of Appeal helped clarify the manner in which such a custom might be applied. Lancaster was an accountant and part-time farmer who had engaged Bird to construct an agricultural shed and other farm buildings. Among numerous disputes between the parties it was argued by the builder, Bird, that the contract price had been agreed exclusive of VAT.



The Court of Appeal disagreed. This was not a case in which the custom and practice of the construction industry as a whole could be taken into account.

The question of whether or not the price included or excluded VAT turned on the terms of the particular contract. The Court of Appeal noted that this would normally be made clear expressly and that it would generally be in the interests of the builder who would be receiving the price to make it clear. If the builder failed to make it plain to the employer that he is stipulating for payment of VAT in addition to the contract price, he will be left to account to the Inland Revenue for the VAT from the amount he receives.

While the Court of Appeal recognised that there may be a custom in the building industry that prices quoted are exclusive of VAT, such a custom must be proved by evidence. There was no evidence of custom in this case.

Neither was there likely to be any such evidence available on a contract between a small builder seeking to be paid in cash and a part-time farmer. It was unlikely that there would be an implied custom that VAT should be paid on top of the cash payments. Moreover, the building that was being built was not an agricultural building in respect of which the employer would be able to reclaim VAT, if indeed he was registered as a farmer in respect of his farming enterprise.

A further point to note concerns settlement agreements. These will generally embrace both sums paid in respect of work carried out or services rendered, and sums paid in lieu of damages for breach of contract.

This latter might, for example, include interest for late payment. HM Customs and Excise has made it clear that the former element of the settlement that is in respect of work or services rendered will generally attract Value added tax, whereas the latter will not.



BOXTEXT: Visit Geoff Brewer on the internet at http://www.brewer-con.co.uk, which now gives a fully searchable library of all articles published in Contract Journal since January 1996.



BOXTEXT: INBRIEF



The Case: Lancaster-v-Bird, CA, 9 December 1998.



The Issue: Whether a contract price is to be treated as inclusive or exclusive of Value added tax.



The Implication: Where a contract is silent on the question of VAT the contract price will generally be taken to be inclusive of VAT unless a term can be implied to the contrary. While there is a custom generally in the construction industry to the contrary, this must be proved upon evidence to apply to the particular case.