BUSINESS ADVICE
5 secrets to get your VAT right
VAT is complex for tradespeople , this guide will explain the main points
» THERE ARE A HOST OF CHALLENGES that installers face in running their companies . Ben Dyer of Powered Now looks at one of them – dealing with VAT .
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 .
Secret 3 : Know how dangerous being too clever is
It might seem an obvious trick to try to minimise VAT by setting up many companies each of which would be under the VAT limit . However , this isn ’ t allowed . Setting up “ Installers North East London ”, “ Installers North London ” etc . to avoid VAT is disallowed , whether these are separate companies or just trading names .
To be able to qualify as separate businesses , they must be in a different line of work and use different staff . So , someone who had a team of one only doing landlord gas safety certificates and a totally different team of four never doing gas safety certificates but doing installations , upgrades etc might be able to try this . They would probably get away with not having the gas safety certificate business VAT registered , provided it had annual sales less than the VAT registration limit of £ 85,000 .
If you think that taking risks with not registering and not charging VAT is worth it , talk to Uber . They are facing an HMRC back VAT tax bill that could top £ 1,500,000,000 . And there ’ s no chance to recover this from their customers . Don ’ t think that something similar can ’ t happen to you albeit on a much smaller scale .
Secret 4 : Choose the correct VAT scheme
The normal VAT scheme is where a business submits their VAT return once every three months based on sales and costs invoiced in that three-month period . These are included based on the date they were raised whether or not they have been paid . This is known as the accrual scheme and is the default .
The alternatives are the “ Cash accounting ” and “ Flat rate ” schemes .
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MAR / APR 2022
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