Frequently Asked Questions

We are the project manager on an NEC3 ECC Option C (target contract with activity schedule) in the UK. Our query relates to non-recoverable value added tax (VAT) for lease cars for the contractor’s staff and whether it is payable under the schedule of cost components or whether it is deemed included in the fee.

Under the schedule of cost components, item 13(n) includes payments made in relation to people for a vehicle. In the guidance notes, it states that item 13(n) will include the cost of items such as fuel, road tax, breakdown recovery and motor insurances paid by the employer for the relevant vehicle. There is no mention of VAT, however the wording ‘items such as’ suggest that it might not be an exhaustive list. Clause 50.2 includes that any tax which the law requires the employer to pay to the contractor is included in the amount due. However, the law requires VAT to be paid by the contractor, not the employer, so we do not believe this applies.

Clause 52.1 states that all the contractor’s costs which are not included in the defined cost are treated as included in the fee. Defined cost includes only amounts calculated using rates and percentages stated in the contract data and other amounts at open market or competitively tendered prices, with deductions for all discounts, rebates and taxes which can be recovered. So, if non-recoverable VAT is not payable under the schedule of cost components, it would be deemed included in the fee, however that slightly contradicts the last part of the clause, ‘taxes which can be recovered’.

If the VAT applies to the private use component of the lease car, it is not required to provide the works and therefore not payable under the schedule of cost components. However, that may lead to some debate as to the private use component of the lease cost. We would appreciate any guidance you have on where the costs relating to non-recoverable VAT should sit. 
Guidance notes are just for guidance, they do not change the meaning of the contract. As you rightly say, clause 50.2 is irrelevant. It is the schedule of cost components which sets out what is to be paid as defined dost. This is a cost in relation to people, and those people are needed to provide the works, which has a very wide meaning, see clause 60.1(13). Therefore this is about ‘payments made in relation to people’, see the start of item 13. Your suggestion that this is not required to provide the works cannot be correct as that could be an argument that would apply to most, if not all, the items listed under that component.

If the person’s contract of employment requires the benefits listed in item 13 to be provided, the schedule of cost components makes it clear that the contractor can get paid whatever costs it has paid for these, no matter what it was. VAT would normally not be included, because the contractor can recover that and therefore clause 52.1 applies. But if the contractor cannot recover a tax paid for a component listed in the schedule of cost components, it is entitled to be paid for the non-recoverable parts. This conclusion is fortified by item 13(i), as this payment is also made to meet ‘the requirements of the law’.

Finally, if taxes were excluded just because they are taxes, that would mean that the contractor would not be paid for items such as landfill tax for spoil taken from the site, or national insurance contributions for people it employs. But those items can be and are payable because they are payments made to provide the works. Therefore, non-recoverable VAT on contractor’s lease cars is an item that should be paid.

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