Secret 1 : You need to get your head around VAT

VAT is “ Value Added Tax ”. This is a tax which every business must add to their sales invoices as soon as their sales in the trailing 12 months go over £ 85,000 . As soon as you hit this milestone you must register for VAT with HMRC within 30 days . You can also voluntarily register at any time which has advantages for some businesses .

Once registered , the business must then file a quarterly VAT return through software and their online VAT account will tell them when to do that . They will also make payments to HMRC , normally one calendar month and seven days after the end of each quarter .

Suppose a VAT registered installer buys £ 1,000 of materials plus £ 200 VAT at 20 %, giving a total materials bill of £ 1,200 . Then they do £ 5,000 worth of labour and charge £ 1,000 + £ 5,000 = £ 6,000 then add £ 1,200 VAT at 20 %, giving a total bill to their customer of £ 7,200 .

Since VAT is due to HMRC , it seems like the installer

will be £ 200 ( the VAT on the materials ) out of pocket but this isn ’ t the case . The installer only has to pay HMRC £ 1,200 ( the VAT received from the customer ) - £ 200 ( the amount paid to the supplier ) = £ 1,000 . So , out of the £ 7,200 received , they pay £ 1,200 to the supplier , £ 1,000 to HMRC and get the full £ 5,000 for their labour .

Using the same example , a non-VAT registered business would charge the customer £ 1,200 ( the amount they paid for materials including VAT ) + £ 5,000 ( the amount for their labour ) = £ 6,200 . This is £ 1,000 less than the VAT registered installer for the same work and hourly rate . This gives the non-VAT registered business a competitive advantage when selling to consumers .

If you are selling to other VAT registered businesses , it ’ s the opposite . Say you are not VAT registered . The numbers are the same as above and the bill to the customer is £ 6,200 .

The installer gets £ 5,000 for their labour and covers the cost of the materials but their VAT registered customer can ’ t claim the VAT back so they are £ 200 worse off .

Using the same example , a VAT registered business selling to a VAT registered customer £ 7,200 including £ 1,200 VAT which the customer could

claim back . So they have a competitive advantage over the non-VAT registered customer .

Secret 2 : Understand when to apply the different VAT rates

The following are the VAT rates used in the UK :

• Standard Rate ( 20 %)

• Exempt - no VAT

• Zero ( 0 %)

• Reduced rate ( 5 %)

Items exempt from VAT include postage stamps , insurance and education .

VAT for most work on houses and flats by builders and other trades is generally charged at the standard rate of 20 %. This includes building an extension , annex or granny annex , converting a loft and carrying out repairs or renovations . New builds are usually zero rated

and some conversions and refurbishments qualify for the reduced rate of 5 %. Other work qualifying for this lower rate are the installation of energy saving devices and installations relating to people ’ s disabilities .

But the supply of materials without installation is always standard-rated ( i . e . 20 % VAT ) including all energy-saving materials . Energy-efficient products which are never eligible for the reduced rate ( except where grant-funded ) include secondary or double glazing , energy-efficient condensing boilers and fridge freezers . It ’ s complicated !

Unfortunately , it can become even much more complicated if you do work that has a mixture of rates . In this case it ’ s probably worth touching base with an accountant to get some advice .

82 MARCH 2022

CLEARVIEW-UK . COM