It has been said that only two things in life are certain – death and taxes. However, when the tax in question is VAT, there is a surprising amount of uncertainty. The recent decision of Mr Justice Burton in E-Nik Ltd v Department for Communities and Local Government, shows just how risky it can be to leave the question of whether VAT is included in, or additional to, a price quoted in a contract unanswered. Even when parties think they have addressed the matter, any carelessness in wording the relevant clause could result in an unexpected outcome.
In E-Nik, a supplier of IT services claimed payment under a consultancy agreement at a specific hourly rate (£850). The contract did not address the issue of whether VAT was additional to, or included in, the rate. The supplier claimed that VAT was payable on top of the rate, but the employer disputed this. The supplier pointed to a number of factors in support of its position (that VAT was extra), including:
- A course of dealing with the employer over the years in which VAT had always been payable in addition to the quoted hourly rate;
- The fact that if the hourly rate was inclusive of VAT it would be lower than the claimant’s lowest hourly rate; and
- during the term of the contract it had rendered invoices and received payment on the basis that VAT was payable in addition to the hourly rate.
- However, the judge held that there was no agreement, either express or implied, that VAT should be added to the claimant’s fees.
The E-Nik case highlights the importance of construction contracts stating whether or not VAT is payable on top of the contract price.
- In the JCT Standard Building Contract with Quantities, the tender price is expressed as being “exclusive of VAT” and the Employer is to pay “in addition” any VAT properly chargeable in respect of the amount. This makes it clear that VAT is payable on top.
- However, under the NEC3 form, the position is less clear. In a number of the different options under the NEC engineering and construction contract, clause 50.2 states that “Any tax which the law requires the employer to pay to the contractor is included in the amount due”. Although this could be read to mean that VAT is already included in the price, the guidance notes suggest it was intended to mean that VAT is to be added to the price for work/services done to calculate the amount due.
- There is also an ambiguity under the NEC3 form because clause 50.2 refers to taxes “which the law requires” the employer to pay. The law does not require an employer to pay VAT – the obligation is on the contractor / supplier to pay it to HMRC.
More generally, if a contract price is not stated to be exclusive of VAT, or if a contract does not require the employer to pay VAT over and above the contract price, the position may well be (as in E-Nik) that the contractor is – due to its oversight - stuck with the “inclusive” contract price.
When it comes to the interpretation of clauses dealing with VAT, for contractors and other service providers, one thing is certain – silence is not golden. In the absence of a clear and unambiguous term expressly stating that VAT is payable in addition to a quoted price, contractors may find themselves giving their employers an unexpected discount.
See also Further Challenge to Take or Pay Clauses?