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A guide to VAT for tradespeople

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VAT can be a complicated thing to get your head around, but a basic understanding of what it is and how it applies to you can help...

VAT, short for Value Added Tax, is a tax added to the cost of certain goods and services. Most goods and services you buy will already have VAT added to them. The standard rate of VAT in the UK is 20%, but there is a reduced rate of 5% that applies to some things.

In construction and building, most supplies you buy will be standard-rated when it comes to VAT, though some are charged at the reduced rate of VAT, or even at zero rate.

When it comes to providing services as a builder or tradesperson, VAT is only added to your invoice when you’re VAT registered.

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Becoming VAT registered

You must register your business for VAT with HMRC if its VAT taxable turnover is more than the threshold set by the government - currently £85,000 - during any 12-month period.

For some builders or tradespeople, it doesn’t take many jobs to reach that threshold, unless you’re working on a labour-only basis or don’t have much work.

If your turnover is approaching the VAT threshold and you’re unsure whether it’s worth registering or trying to reduce your turnover, see our article on whether or not it’s right for you and your business.

How much VAT should you charge?

If you’re a VAT-registered business, it’s important you charge the right VAT rate. Most work on houses and flats by builders and tradespeople is charged at the standard VAT rate of 20%, but there are some exceptions:

Some types of work like building a new house or flat, or work for disabled people in their home, are subject to zero-rate VAT, so you don’t have to charge VAT.

You can charge a reduced rate of VAT at 5% for some types of work, including: installing energy-saving products and certain work for people over 60; converting a building into a house or flats or from one residential use to another; or renovating an empty house or flat.

It’s also possible that reduced or zero-rate VAT can be charged if certain conditions are met, including when you do the work, who you’re doing it for, the type of work it is and the type of building it is. Make sure you check.

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How much VAT should you be paying?

If you’re paying for services, it’s important to make sure you understand how much VAT you’re paying and whether it’s the right amount. Make sure you check:

  • Whether the price you’ve been quoted is inclusive or exclusive of VAT.
  • Whether the work is exempt from VAT or zero-rated, and that you’re being charged the right rate.
  • Whether you are able to recover the VAT.

What is the VAT reverse charge?

From March 2021, a domestic VAT reverse charge will come into effect as part of efforts to tackle fraud.

The reverse charge will basically allow a customer to charge themselves VAT, rather than the supplier charging it, removing any chance of the supplier not passing on the money to HMRC.

The reverse charge will only apply to businesses that supply services to another business that then sells on that service, but not those that supply services to consumers.

For more information on the reverse charge, visit the HMRC website.

Accounting and tax