Why builders ask for cash in hand

Roll of 50 pound notes

When the news came in that Treasury Minister David Gauke had been slating tradesmen who accept cash for work as well as the homeowners who pay them it was not a huge surprise to me. I had been preparing a blog post on the subject of why builders ask for cash in hand. I was a tradesman myself before I started this business and many of the thousands of builders who use our service often engage me on this topic. It came up again just the other day when we had some roofing work done (by one of the excellent roofers on MyBuilder). After coming back from the cash machine, my wife asked rhetorically: "Why do builders always want to be paid in cash?". Rhetorically, because she already knew the answer. Or at least she thought she did.

I asked her if she knew why, and she said: "Of course! Taxes.".

She was partly right. Taxes is the answer, but not the sort most people assume. An employed person thinks about income tax, which at somewhere between 20 and 45 percent, is the big and noticeable tax for most people. For tradesmen however, the bogeyman is VAT.

But VAT is only 20% you say... and don't you just pass that on to your customers? Yes and yes. But still, the bogeyman is indeed VAT.

Firstly, for a jobbing builder or tradesman, effective tax rates can be lower than for an average employee. Tradesmen can either set up as self employed or as a Limited Company. Being self employed gives you expense deductions and as a Limited Company you can pay yourself in dividends at a lower rate. But it is far from unusual for a tradesman to have annual revenue in excess of £77,000, which is the threshold at which a business needs to be VAT registered.

This may sound like a lot, but you have to remember that £77,000 is revenue, not profit. If I supply and fit a new boiler, I might charge £2,500 and have to turn around and spend £2,000 to buy the boiler. Let's say I manage to do about one of those a week - 50 a year. My revenue would be £125,000 for the year, but I'm really only making £25,000 from that £125,000. And then I have to pay for my van, diesel, tools etc. Imagine I have £10,000 of expenses for the year. I'm pulling in a paltry £15,000 of profit, but at least I only have to pay income tax on that £15,000, not the £125,000.

VAT however, is a very different story. With £125,000 in revenue, I'm well over the VAT threshold. This means that I have to charge my customers an extra 20% on every job. I'm walking through the door to quote on a job and I might as well be wearing a T-shirt that says 'Don't hire me, I'm 20% more expensive'. I can't drop my prices to compensate for the VAT. Remember, I already only have £15,000 of profit per year. So the end result is that I lose business to heating engineers who are not VAT registered. What can I do? The only obvious thing I can do is to avoid VAT registration.

You can't be VAT registered and avoid paying VAT. HMRC will hang, draw and quarter you. Getting paid in cash does not solve the problem when you're VAT registered. You can't insist that customers pay you in cash. Your quote has to include VAT because you don't want to get stuck in a situation where you've omitted VAT and the customer doesn't pay cash at the end.

So the key to survival is ducking under the VAT threshold by doing some cash in hand work. The reduction in income taxes is an added bonus, but this is not the prime reason for working cash in hand. Asking to be paid in cash becomes the modus operandi, because some customers will simply say no to paying an extra 20% on their bill just to be seen as morally correct by a Government minister.

Is this wrong? Yes. Is it tax dodging? Yes. Whose fault is is? HMRC and, at the end of the day, the Government who allow this to persist in these difficult economic times. VAT should be zero-rated on building work, just the same as it is on new builds. Tradesmen are well-known for ensuring that their income circulates back into the economy, whether this is by paying other tradesmen to do work for them, buying new cars or family holidays. Sure,  many tradesmen will have savings and even investments in property, but they will not be squirreling money away in tax havens.

The current VAT system is stopping money from circulating in the economy, is reducing the amount of building work being done and is, however inadvertently, making tax dodgers of otherwise honest workers. It is time for a change.

Picture by Images of Money.


  1. Funny, because if a Politician tells you to do something then you would normally do the opposite and for them to take the morale high ground is laughable. Good post

  2. What you failed to mention is one of the reasons for wanting to be paid in cash is to be paid. You say you were a tradesman at one time?
    If this is so, you'll know what a rubber cheque is, and what a cowboy customer is? Or just the ones that take their time paying. Perhaps the roofer didn't trust your wife.

    Pretty low of you to insinuate as David Guake has done that people asking to be paid in cash are immoral tax dodgers.

    "This may sound like a lot, but you have to remember that £77,000 is .................
    ...VAT however, is a very different story. With £125,000 in revenue, I’m well over the VAT threshold. This means that I have to charge my customers an extra 20% on every job. I’m walking through the door to quote on a job and I might as well be wearing a T-shirt that says ‘Don’t hire me, I’m 20% more expensive’. I can’t drop my prices to compensate for the VAT. Remember, I already only have £15,000 of profit per year. So the end result is that I lose business to heating engineers who are not VAT registered. What can I do? The only obvious thing I can do is to avoid VAT registration."

    Funny you should mention gas engineers. I happen to know quite a few. The obvious thing for the smart ones who lose business because of price is to improve the customer service they provide to their existing customers and to market smartly i.e. for referral work from their existing customers. The ones I know that are very attentive to their customers needs and concerns charge more than the ones that don't care - yet, they are still in business, and doing very well.

    Not everyone shops on price.

    While I agree with that the VAT (tax) system slows down the velocity of money (that's another story for another day) this is a poor article. I would expect better from a former tradesman.

  3. I believe there are valid points in all of the above posts.

    1) The VAT threshold of £77K is way too low or not selective enough.
    2) If you are VAT registered then you may not be as price competitive as those not VAT registered for domestic work only (remember that commercial and industrial clients expect VAT and can claim it back - in such circumstances VAT is not an issue)
    3) If you are VAT registered then you at least can claim back VAT on materials but with the unfortunate side effect that you are exposed then to more income tax!
    4) As a sole trader or small limited business, late payments and bounced checks can be very damaging and stressful.

    In my personal opinion, tradesmen who are in some way registered both as a business (sole trader/limited company) and with a trade association membership should be allowed to claim back VAT on materials even when they are not VAT registered.

    VAT registration for domestic work should be raised to at least £150K total turnover.

    As far as income tax is concerned, everyone earning above the established threshold needs to pay it and should pay it.

    Problem mostly solved!

  4. @conr1... I'm surprised that you still think of cheques as the default alternative to cash. I thought it went without saying that an online bank transfer is the usual and preferred payment method (from a customer point of view). It is in fact the only good alternative to cash in this situation. Getting large amounts of cash out is time consuming and painful, because it requires a visit to a bank branch during opening hours. Logging into your internet banking is quick and easy, it's 24/7, free and in almost every situation, it's instant. In fact, just the other day I bought a car and paid the guy with a bank transfer while he was standing next to me, at 9:30PM. He then logged into his bank account, confirmed that the funds where there, and handed me the keys. Why would anyone prefer large amounts of cash and all the hassle involved? Well, the obvious reason of course.

    But still, most of the blame lies with HMRC. An individual tradesman's priority is and should be to provide for their family and you don't willingly put yourself at a 20% disadvantage to your competitors. It's the sort of bad tax policy that we would expect in a Southern European country, not in a liberal economy like the UK.

  5. It's simple, that VAT threshold does simply mean that VAT registered builders end up losing out on work due to 20% extra.
    If I priced an extension at £8,500, yet another builder can manage it for £8,500 but he is VAT registered so add his VAT, this makes him £10,200. In this current so called recession, people have less to spend therefore the VAT reg'd builder is highly likely to lose out!

    I know lads that manage to avoid going above the VAT threshold in other ways which are legal, all because they know as soon as they have to put 20% on their invoices, they WILL lose work!

  6. @Ryan Notz....I agree that bank transfer is far more convenient than cheque but as for saying online bank transfer is the usual and preferred payment method i disagree, well its deffinetly not in may case anyway...
    In my trade(garden walls, patios, driveways) a very large number of customers are over 60s, many of them have no internet access or have very limited computer skills.
    To make payments by bank transfer you first need to register for internet banking wait for your bank to send you a pin number by post then when thats complete you then need to call your bank to authorise sending payments, after you've sent your first payment its straight forward but most people have no need for this service so they are not going to go through all that to send a one off payment particulary if you are no good with computers.

    I have been a sole trader for 3 years and only had 3 or 4 payments via transfer in that time.

    I'm not saying thats the case for everyone but i find cheques are far more common although I do preffer bank transfer.

  7. I agree with Ryan's comments and have been saying for years that quote + VAT = losing out to a non VAT tradesman! But of late i have seen other builders in my area who are VAT registered working for a pittance to keep their prices down to be competitive. This is not good as we ALL have bills and expenses to pay.

    I like the idea of either domestic work being zero rated or raise the threshold but even £150k is low to a domestic extension builder, thats 1 big extension or 2 small ones and your over the limit. So zero it is for me.

    I have started in the last year offering alternative methods of payment on my invoice. Bacs (electronic), cheque or cash. Lots of customers are moving to BACS. its quick, easy and best of all no waiting for cheque to clear! Banks are in the 21st century yet still want 3 days to clear your funds. Why?

    The government will never look at the problem and admit they have got it wrong. Because as far they are concerned, what they do and say is best and like sheep we must follow with this.

    A good article and one that will never go away.

  8. There is a simple solution to this problem. As a nation we undertake work in our homes or hire cheaply and it's a but of a joke in terms of quality control. People are happy to fork out on clothes cars and nights out, yet work undertaken in the home is obtained as cheaply as possible. I feel a system needs considering where the homeowners rights to undertake work are maintained yet monitored. Essentially against our will we are not allowed to drive without a seatbelt nor buy too many paracetamol in the nanny state so why are we not controlled on the maintenance on our homes??

    Ultimately a system of permits can be introduced. Any work undertaken without permit being subject to harsh fines etc. said permit is applied for, and either the client undertakes the work with visits from a lesser building control, or the work is permitted to a contractor. All building work contracted to a builder is subject to 20% VAT levelling the playing field and increasing GDP and any contractor tagged to a permit goes to the town hall, with proof of insurance, qualifications, guarantees, a contract, ID so on and so forth.

    Not only will private pricing come back to a more profitable level, tax evasion in construction could be wiped out, unscrupulous contractors would be a thing of the past and the GDP provided by the these introductions would benefit everyone concerned.

  9. Permit system,!!!!!!!!!! I have to say the only problem with that, yet again the government wins, by introducing that idea will anything get done, apart from more jobs for paper pushers and more red tape! And more time I spend in a queue rather than working!!!

    I agree that there is a problem with silly estimates from certain builders that end up on telly (you no whom your are) how ever that been said customers I find are getting wise and will ask for references and photo's before work commences and will implement a terms of contract too, if not I will agree one before works start.

    Regarding the vat yes this is a big problem I run flooring firm and as you can imagine my material cost is ridicules, which pushes way in the vat threshold!

    Which means that I lose so much work to small one-man bands.

    For example I quoted a job today for £1649.00 x vat £329.80 only to be told my prices where to high and they had been quote £350 cheaper! Hum wonder why!

    Simple answer is vat law abiding, sit at home with no work! Something needs to change!

    Maybe stop the vat charges at the shops where the materials are bought and let the builders work as lets be honest most builders are really bad at paperwork.

  10. i agree with ryan well said taxed to death high and mighty politicians who fiddle there expenses trying to take the limelight away from them i would never get any work if added vat i end up working to loss on most jobs to compete there are people out there coming in with silly silly quotes you know full well it can't be done and warn customer corners are bound to be cut but price always wins cheapest country is fxxked politicians have not a clue

  11. We can keep going on until were blue in the face about vat but honestly will things ever change? one legal way around vat which any accountant will tell you is let the customer pay for materials. I know this only works for the small tradesman but as was said earlier 1 large extension has a significant material cost. What sometimes gives me the edge is that I buy materials on credit for a delivery address and at the end of the month present this to the customer to pay off from there credit card
    If I'm Jobbing then this is not a problem because materials are not that high and would not expect to throw me over the threshold

    Having good customer relations and trust is the key to this system and will not work for every situation

  12. Ryan notz, well said sir.

  13. I Think that the majority of the previous comments bounce around the same answer. The public seem to think that the tradesman is earning a fortune because of the large bill they receive on most home improvements, this is not because the tradesman wants to rip the HMRC off but make a living. VAT is a killer and we all would like to pass on that saving to the client. I am a plumber and i fit bathrooms and boilers. Imagine if you will. A client goes into the trade counter orders all the CORRECT components and pays for them..... UNLIKELY!!! i know but they do it. You as a trdaesman are standing behind them and order the exact same stuff and get it 30% say! cheaper. The customer feels hard done by and laerns from this. This encourages customers to get the contractor to supply the materials on the next job. Thus pushing him to the threshold of VAT much sooner than those who just get the client to pay for materials straight off the bat. This makes the cheaper job and a happy customer, Right!! Wrong this makes a customer think that the next tradesman is making 30% profit on every job and they want a piece of the pie by driving the good honest tradesman into obbiss and allowing the cheap corner cutting DIY bloke a good prospect, Once the customer has realised what they have hired, Mistrust is born and the rouge builer is alive and kicking. The customer then wants to pay cash for the cheaper deal, thus making the HMRC the outsider. Cometh the man to fix it all and he is ££££ more exspensive as he has to rectify all that is underpinning the problems. He then hits the vat threshold and is another 20% more again making him look like the crook. I think that the Government are an ass there should be no vat on any home improvements as buildings need maintenance and care just like everything that is made. A floor needs maintenance why do bricks need it boilers need it gardens need it. A Law should be passed through the commons to state this and governments should lead from the front and reinstate mantenance contracts throughout the public sector instead of kicking the tradesman into the ground and then claiming that we are robbing the country of finance.I for one and like many of you guys on here are honest and pay my taxes. I am dreding the time when i hit the vat threshold as i dont think it will be long before that happens customers should be asked to pay for materials up front and given the receipts to prove they are not ripped off and should just pay us the tradesman immediately the work is finished weather by BACs or bank transfer one of payment or not. If you have the means to pay you have been given a quote its the customers responsibility to pay on the day. everything is on the table and the gov lose nothing.
    Long winded but there you go. Suck on that Mr Minister.

  14. VAT should be raised to £101k for construction tradesmen & girls!

    To be totally honest I will be very surprised if we hit £77k this time around with the shortfall in work available and 100s more unemployed getting into the trade on a self employed basis

    Smaller companies are getting a lot more work as they are cash in hand.

    What are we going to say "No I cannot do a better deal for cash"

    Guaranteed the next man/girl will.

    And the mortgage will still need feeding

    Concept building services

  15. It's a little inaccurate to state "I have to charge my customers an extra 20% on every job"; in the example given (boiler change) the only extra cost the customer would incur is 20% VAT on the labour, bringing the total to £2600, not £3000 as the statement implies.

    For someone such as myself, an electrician, who's materials costs are minimal then yes it would be a pain because Labour often makes up a larger percentage of my quotes, but it's due to the fact my materials costs are low that I can stay below the VAT threshold, and if I were to go over the VAT threshold it would be because of a change in the type of work I was doing, bigger industrial or commercial jobs, where VAT would be reclaimable by my customers.

    I agree that if I had multiple employees it would become an issue, but I think the article was talking about large turnovers for independant builders and other tradesmen.

  16. one thing that i have not seen mentioned is to get the customers to buy the materials and just quote for labour this then in turn reduces the amount and keeps you under the 77k?

  17. VAT is far too much.

    Either make it a criminal offensive for customers to offer it or accept the fact that people are not going to want to pay it

    On a 100k job I'll get about 4k for about 500 hours hard graft and taking a decent amount of responsibility.
    I will pay 32k in vat, NI, and income tax.

    The revenue don't dig one spade, lay one brick, lift one plaster board run a single cable. Etc etc.

    They do pay 12% of there staff for being off sick!

    Who's the cowboys?

  18. DJH: I've never had a problem buying the materials and just paying for the labour. Only an idiot would refuse a job on this basis these days. Obviously I'd be responsible for returns of any faulty items, but that's a small price to pay for £200 off a £1000 job. The problem, of course, becomes finding a tradesman who *isn't* VAT registered but *is* well established, but they do exist.

  19. i never pay for materials up front. only time i will pay for anything is if during the job i need a couple extra things then i will buy because it more convenient for me to go and get there and then . my advice is tell customers what you need, get a printout from builders merchants and get customer to pay upfront for materials. you dont go to sainsburys and have the company pay for your food with the understanding you will pay them after you eaten the food.

  20. I was quite shocked to read your article, you are wrong when you say the ''My Builders'' trades people are tax dodgers, 60% of our customers do not want to pay 20% vat, in this case we pay the vat from our pockets. If you are a Ltd company you cannot dodge the vat or taxman.
    In my case, I have been a short time with My Builder, I've had 11 jobs, a few of them were landlords not living at the address, some of them issued a cheque which bounced, another asked us to go back for the money which we never received.
    Do you think I should accept cheques in the future?

  21. hi never had the problem,but i do not work for landlords.
    been taken before for my deposit and some thing to do with that word loard

  22. I think it's hard. I have worked for 2 building and concrete firms in the West Midlands and have now set upon my own....now I've been working hard shovelling concrete and laying bricks for well over 10 years...and omg the work load has lessened more and more...every customer I have no idea,who they are, what they do but I show up ready to quote a job.....for all we know its some crazed mass murderer...then we are expected to give our best price and god knows we are human. It's possible to miss something, the ground could be crap, walls might be weak etc etc etc. Once you have figured out what it is, they are asking you then send them a quote....and of course some bloke 2 miles down the road with a nail of a van beats you by £500 and you lose the job...but we can't bill our time for the quote, walking into the unknown, our years of experience and we just have to accept that. Then you add your vat. People look at you as if you punched their nan square in the face......but no...your being honest and well your the bad guy....explain to me how this is fair....because I'm sure that doc gets to charge to look at that women's dodgy nose or wonky chin. Yet as a builder,who wears mucky clothes its acceptable to laugh him out your home. For costing a job up, and being stung every which way for hurting his hands and back. I know we choose this career, but at what point did I ever sign up for being robbed for being honest.

  23. Why don't you just get the client to buy the boiler? You can have an agreement where they get a trade price & you might even get some sort of kick back from the supplier. Builders openly abuse the tax / vat system, but all expect their children to go to school at honest tax payers expense. Man up boys & pay your dues like everyone else. Don't see many nurses dodging tax do we?

  24. Good idea, ok

  25. I am vat registered and yes your right it does mean in the majority of cases I don't even get considered to quote for a job because of it. I now find that most work comes from other people who are vat registered themselves ie other businesses so it has changed my business direction .
    But I think what would be fairer would be to drop the vat threshold to say £25000 so any one turning over more than their wage instantly has to be vat registered . In effect all businesses would then have to charge vat regardless !

  26. VAT and Tax are the reason behind of this. As far as I know, there are some other reasons like in some places the workers or laborers are working on a daily basis. At the end of the day, then they should be paid by cash. So this may be a reason of builders ask for cash in hand.

  27. VAT is charged on most consumer items including cars, electronics, food, fuel etc.

    Why should a domestic customer not expect to pay VAT on a rewire or extension? They quite happily pay VAT on the brand new car they cannot afford on HP or other items on credit with interest charged on top!

    Does Esso knock off the VAT when I pay for my petrol in cash? No. When you pay for work in cash you will not get a receipt and have a leg to stand on when things go wrong.

    These tradesmen accepting cash continue to bring down the image of the construction industry and keep wages stagnant.

  28. I am a sole trader with 3 years experience and am just starting to be offered cash, after i have given them a price, without them wanting anything deducted from the bill. It really is a quandary. I suppose i look at the people i have worked for in the past and see the the most skilled/successful/good with their money are the ones that do very little cash in hand. I have over the last two years especially come to see my profession as at once very skilled and brutally laborious and as such deserving of decent pay. Just because i do not have any qualifications does not mean that if i am doing something properly i should not be paid the same as a teacher or a nurse or a fireman. Does accepting cash, aside from the moral difficulty of general fairness, push down builders wages? Especially as not everyone will offer cash, and not everyone thinks its OK to deal in cash. I don't know.

  29. How about lowering vat rate to everybody and making all businesses to pay it regardless of revenue?

  30. As a non-trade but self employed person who doesn't see any cash- I disagree. The wages of trades people have increased massively as a result of the general shortage of trades people through supply and demand. This means that the price of having work done is enormous to your average 'wage slave', who is then forced to offer cash or do anything to help lower the cost of the after tax bill they face. Accepting cash and paying less income tax are virtually synonymous and is simply the icing on the cake for trades people who are simply in the right job at the right time. After a while tradespeople start to think that because they are earning so much money- more than most professionals with large educational backgrounds- their jobs must actually be really skilled or difficult in some way- and prices and perception continue to trend upward. In fact trades people earn far more then they deserve for jobs far less skilled and demanding then they perceive them to be- as evidence of this try taking a plumber and turning them into a professor at a university. How long would that take? Probably about fifteen years of further education and only the very brightest tradespeople could even do it. Yet plumbers earn more than professors in this country. You think a professor cant tile a bathroom or install a boiler with a couple of months training? The professor with their superior ability to learn would find this a doddle. Yes trades people have been paid to little and not respected enough in the past, but they are paid too much and respected to much today as well.

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