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Everything to know about VAT for trade businesses

This guide aims to shed light on the complex topic of VAT for tradespeople. We will outline the basics, as well as when and how to register and tips for staying under the threshold. We also share tips on how to ensure compliance, key changes to be aware of, and crucially, the VAT mistakes to avoid.

The decision to become VAT registered or not is a key consideration for every business.

In order to run a successful company, you’ll need to know your responsibilities when it comes to paying and charging VAT. Read on for our complete guide to VAT for tradespeople.

Understanding VAT for trade businesses

VAT stands for Value Added Tax and is added to most products and services sold by VAT registered businesses.

VAT is applicable to all taxable supplies and is charged at the standard rate of 20%. Some goods are only chargeable at a reduced rate of 5%, or even 0% where no VAT is levied.

Unfortunately, VAT is more complex for trade businesses than it is for most other industries.

There are multiple VAT rates with all sorts of rules about when they can be applied. Some of these rules include whether work is for a new build or renovation or whether the project is green.

In addition, there are special rules for Domestic Reverse Charge (DRC) which in turn overlaps with the Construction Industry Scheme (CIS).

If your business exports to the EU, you’ll need to work your way around the UK and EU’s VAT regulations. Goods and services sent to the EU are zero-rated, meaning no UK VAT is payable.

However, for exports to some EU nations, you may need to register and account for VAT in the country of supply. The lowest standard VAT rate in the EU is 15%. If your customer is VAT registered in their respective EU country, they should be able to claim the VAT back.

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When to register for VAT

You must register for VAT if:

  • Your total VAT taxable turnover for the last 12 months exceeded the VAT threshold of £85,000
  • You expect your turnover to go over £85,000 in the next 30 days

You must register for VAT within 30 days of the end of the month when you went over the threshold.

If you fail to do so, you must pay VAT on any sales made since the date you should have registered. You may also need to pay a penalty.

You can also choose to voluntarily register for VAT if your turnover is less than £85,000. We’ve outlined some of the reasons why some businesses opt to do this, below.

The benefits of becoming VAT registered

Help with cashflow and profitability during the start-up phase

It’s worth registering straight away if you’re just starting up and you know that you’re going to quickly exceed the VAT threshold. It’s also a good idea if you’ll mostly service VAT registered businesses too.

This is because you can claim your VAT on the costs of setting up the business. HMRC will actually pay you if your VAT return shows that they should!

This will help with cashflow and profitability during your startup phase.

Reclaim the VAT on company purchases

Many companies decide to register for VAT before they reach a turnover of £85,000. This is because this allows them to reclaim the VAT on company purchases.

There are savings to be made on expenses such as work laptops or mobile phones, workwear, and even your daily sandwich.

A marker of success

Some register for VAT to emphasise to potential customers that they’re a professional operation.

It can benefit your business customers

The big advantage comes when you are selling to other businesses that are VAT registered. In this case, they will be able to claim back any VAT that they pay.

You would think that they are neutral when it comes to whether you are VAT registered, but that isn’t the case.

Let’s look at an example of when you are VAT registered and selling to another VAT registered business.

Scenario 1: your business IS NOT VAT registered:

  • You charge £1,200 + £2,000 = £3,200 which you get paid for
  • You pay £1,200 to the supplier
  • So, you receive £2,000 net
  • Your customer cannot claim back any VAT so they are £3,200 out of pocket.

Scenario 2: your business IS VAT registered:

  • You charge £1,200 + £2,000 + VAT = £3,600 which you get paid for
  • You pay HMRC £600 – £200 = £400
  • You pay £1,200 to the supplier
  • So, you receive £2,000 net
  • Your customer can claim all their VAT back of £600 so they are only £3,000 out of pocket.

Your customer ends up paying less. That’s good.

Note: this example ignores the impact of the Domestic Reverse Charge (DRC) which won’t change the overall impact of VAT registration.

Under Making Tax Digital, you must keep computer-based records of sales and costs and submit VAT returns to HMRC electronically.

how to register as a sole trader

The downsides of becoming VAT registered

More paperwork

Being VAT registered does mean more paperwork (which is bad news for those who find admin a chore!).

Make sure you add VAT to all your client invoices and keep your VAT invoices and receipts for any company expenses.

You’ll also have to submit a quarterly or annual VAT return.

You will need to keep a running total of sales, especially if you are nearing the £85,000 threshold. Failure to do so could result in big penalties.

It can make it harder to win business

If you’re regularly up against non-VAT registered companies when you quote for jobs, it could be better not to become VAT registered. This way you can keep your prices more competitive.

It can disadvantage your residential customers

When you sell to residential customers and you’re registered for VAT, you can claim back the VAT on materials. However, you have to pass on the cost of VAT to your customers.

There are some exceptions, but we’ll ignore these for now.

Looking at the same case as above, but this time you’re VAT registered and selling to a residential customer. Example: you might pay £1,000 for materials + VAT = £1,200, which cost you pass on. You charge £2,000 labour with VAT added only if you are VAT registered.

Scenario 1: your business IS NOT VAT registered:

  • You charge £1,200 + £2,000 = £3,200 which you get paid for
  • You pay £1,200 to the supplier
  • As a result, you receive £2,000 net

Scenario 2: your business IS VAT registered:

  • You charge £1,200 + £2,000 + £400 VAT = £3,600 which you get paid for
  • You pay HMRC £600 – £200 = £400
  • You pay £1,200 to the supplier
  • As a result, you receive £2,000 net

The disadvantage is that your customer gets charged an additional £400 for the same service while you get the same pay. That is a competitive disadvantage compared with non-VAT registered rivals.

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How to register for VAT

To register for VAT, you will need:

  • A National Insurance number or your tax identifier (Unique Taxpayer Reference UTR)
  • Details of any other businesses you’ve owned in the past two years
  • Your business bank account details

There is no cost to register for VAT.

There are three ways to complete your registration:

Register online

Most businesses register for VAT online.

To do this, you need a Government Gateway user ID and password. You can create this when you sign in for the first time.

Once registered, you will have a VAT online account.

Use an accountant or agent

If you’d prefer, you can appoint an accountant or agent to submit your VAT Returns and manage the process for you.

You can still sign up for a VAT online account if you opt to register via an agent.

Register by post

To register for VAT by post, you’ll need to send to HMRC the VAT1 form and any additional documents required.

Invoice on a laptop

Cancelling your VAT registration

If you’re no longer eligible to be VAT registered, it is possible to cancel your registration.

This could occur if you stop trading or making VAT taxable supplies or if you join a VAT group.

You can also request HMRC cancel your registration if your VAT taxable turnover falls below £83,000.

If you stop being eligible for VAT registration but don’t cancel your registration within 30 days, there can be penalties.

You can also defer VAT on certain products and purchases, which you can find out more about in our guide to deferred VAT.

What is the VAT threshold?

The VAT threshold is the volume of annual turnover at which businesses are required to register for value-added tax (VAT).

How to stay under the VAT threshold

There are a few ways your business can minimise its VAT liability and get the most out of its VAT Returns.

Split your business

There are a few ways to stay under the VAT threshold, one of which involves splitting your business to avoid VAT.

You can break your company down into separate businesses, but each part needs to offer different services to make the distinction clear.

You should also consider having separate bank accounts and you’ll need to complete two or more tax returns.

Review your payment process

  • Get customers to pay directly for the materials that will be used on their job.
  • Use disbursements. The Powered Now app helps with this, but you must follow very precise rules to make it work. This is when you “buy on behalf” of your customer, which means the costs don’t have to go through your books.
  • Get customers to pay your subcontractors directly. This means you can incorporate the mark-up into your own billing. This also avoids CIS

What if you temporarily exceed the VAT threshold?

If your business goes temporarily over the VAT threshold you may be able to ask the HMRC for an exception. Make sure this is submitted in writing less than 30 days after you go over the £85,000 threshold.

VAT compliance

Filing VAT Returns and VAT compliance is arguably more streamlined now, with the new Making Tax Digital initiative. It makes it “easier for individuals and businesses to get their tax right”.

As a VAT registered business, you must:

  • Keep records of sales and purchases
  • Keep a separate summary of VAT
  • Issue correct VAT invoices

You must keep your records for at least six years, or ten years if you used the VAT MOSS service.

Make VAT simpler with a business app

We help our members by giving them exclusive access to the Powered Now app

Find out more

Common VAT mistakes to avoid

Mistakes concerning VAT can be very expensive to put right.

Some of the most common mistakes businesses make with VAT include:

  • Entering incorrect figures
  • Failing to keep clear, accurate records
  • Failing to submit (and pay) a VAT Return on time
  • Reclaiming VAT on fuel and vehicles
  • Reclaiming VAT on entertainment
  • Reclaiming input VAT without a valid VAT invoice
  • Claiming VAT on purchases that are zero-rated or partially exempt

VAT for trade businesses can be incredibly complex. Please reach out to a qualified accountant if you need assistance.

Benefits of voluntary vat registration

Changes to VAT laws and regulations

There have been some changes to VAT laws over the last two years. Here’s a summary of what you should be aware of:

VAT reverse-charging for building and construction services

The VAT reverse charge was brought in on 1st March 2021 as an anti-fraud measure. It prevents building and construction providers from absconding with the VAT they collect from customers. Make sure you’re aware of your responsibilities by reading our guide on:

VAT reverse charge for building and construction services.

VAT for sole traders vs limited companies

The same VAT threshold and conditions apply to all business structures, including sole traders.

Having full control of your business activities and organisation as a sole trader means VAT registration will be your responsibility.

As sole traders oversee calculating, charging, and transferring VAT to HMRC, it’s crucial to have a thorough understanding of the process.

You can of course seek the help of a qualified accountant if you’re unsure.

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FAQs

Can I still claim back VAT on business expenses if I am below the threshold?

Only VAT registered businesses can claim back VAT on business expenses. You can voluntarily register for VAT if your turnover is below the threshold of £85,000.

Are there any special VAT rules for businesses that operate internationally?

If your business exports to the EU, you’ll need to work your way around the UK and EU’s VAT regulations. Goods and services sent to the EU are zero-rated, meaning no UK VAT is payable.

However, for exports to some EU nations, you may need to register and account for VAT in the country of supply. The lowest standard VAT rate in the EU is 15%. If your customer is VAT registered in a EU country, they will still be able to claim the VAT back.

How often do I need to file VAT Returns, and what information do I need to include?

You normally need to file a VAT Return with HMRC every 3 months. You will need to include your total sales and purchases and the amount of VAT you owe. As well as this, include the amount of VAT you can reclaim, and the amount of VAT you’re owed from HMRC.

Are there any exemptions or reduced rates for certain types of goods or services?

The standard rate of VAT is 20%. However, some things are exempt from VAT, for example, stamps and financial and property transactions.

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