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Should tradespeople register for VAT?

Reading time: 5 minutes

Many tradespeople have questions about VAT and what it can mean for their business. Carl Goulding, MyBuilder’s head of trade quality and a veteran tradesman, shares his advice...

There is no one-size-fits-all advice when it comes to VAT registration. Lots of builders will work pretty hard to avoid ever hitting the VAT ceiling by never taking on enough work to reach the threshold at all, which works pretty well for many who just want to earn a living in peace.

However, if your plans are to build a substantial business in construction, VAT registration is something you will be faced with sooner or later.

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The pros and cons of VAT registration

There’s no denying that VAT can be confusing and the extra admin can be a pain in the backside, but hands down the biggest downside to VAT registration is having to charge more.

This is unavoidable, because you now have to add 20% to every penny you charge your customers in order to fulfill your new role as an unpaid tax collector for HMRC.

It’s not all doom and gloom, however - there are some perks to being VAT registered. Reclaiming 20% VAT is always a nice feeling.

The way I see it, is if you decide to register for VAT, you have two choices for how to handle your pricing going forwards. This choice really depends on the health of your business.

  • Your first option is technically the 'correct' one and relies on you changing how you price your jobs altogether. It’s a method where you discount all expenses to their VAT exclusive price. Let’s say you have a painting job and are supplying the paint. The paint costs £12 from your local supplier (let’s call this £10 + VAT). As a non-VAT registered business you would purchase the paint for £12 and charge it out at £12 to your customer. As a VAT registered business however, you would instead charge the pot of paint out to your customer at £10 + VAT. Then when VAT is added the pot of paint becomes £12 again. You and your non-VAT registered competitors still both charge £12 for the paint and your customer is none the wiser. The downside however, is that you also have to add VAT to your labour costs which of course may make you more expensive overall, just not by a whole 20%.
  • Your second option requires your business to cope with raising your prices further. For this option you continue to price everything as you did as a non-VAT registered business and then simply add 20% to your total at the end. That same pot of paint you purchased for £12 before, you now resell for £12 + VAT meaning it costs your customer £14.40, earning you a little profit.This worked really well for me when I crossed the VAT threshold. I had been wanting to raise my prices for a while, but with lots of repeat customers I felt stuck, as I didn’t want them to think I was simply raising prices on them. By using VAT registration to effectively mask a price rise I was able to cross the threshold and raise my underlying prices too.

In either case you will need to raise your prices - the question is by how much. Only you know how desirable your services are and how much people will pay.

On the plus side of VAT registration though, you can start reclaiming the VAT you have put into the system. Here, you will start to reduce the VAT bills that start arriving, and this is where some of the perks are hiding.

Being VAT registered can also indicate to a customer that you’re a business that operates at a certain scale, which might give them more confidence in your service.

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'Reclaiming' VAT vs 'reducing' your VAT bill

So the way VAT works is that you add 20% to every penny you charge your customers. If you want to charge someone £100, then this becomes £100 + VAT (£120 in total) and in this case the VAT man will want £20 from you. You must hand over to HMRC any VAT you collect, no questions asked.

Now, let’s say that to earn this £100 you painted a room and that £12 pot of paint was needed to do the job. Because you paid £10 + VAT for it you have already paid £2 VAT to the VAT man through the supplier. You are therefore allowed to reduce your £20 VAT bill by £2. Your VAT bill is now £18.

But what about the £10 you spent on fuel getting to and from the job? Well you can also reclaim the £1.66 VAT on that too bringing what you owe the VAT man down to £16.34 which is not bad considering you took £20 off the customer. Did you buy any tools or van insurance, clothing, etc? Well this is all reclaimable too (though the rate can vary on different expenses).

The effect of this 'reclaiming' of VAT is not really money paid back to you, it’s more a reduction of what you owe the VAT man from your tax collection efforts. You collected the VAT from your customer and then get to reduce what you hand over to HMRC by offsetting what you spent on VAT while doing the work.

This adds up over time and can make many of the things you wish to purchase for your business that little bit - currently 20% - cheaper. This is when you have a real advantage over your non-VAT registered competitors because that van you want to buy for £8,000 + VAT now only costs you £8,000 because you can reduce the VAT from your VAT bill, whereas it will cost them £9,600 for the same van.

Managing VAT can be painful, however you slice it, and it’s likely that if you’re at that stage, you’ll want an accountant to help you manage things.

The important thing to remember is that it doesn’t have to be something to be feared - you just have to know how to handle it.

Accounting and tax