Understanding VAT registration is important for small construction businesses in the UK. It can affect your operations and finances. We put together a quick guide so you can get familiar with the requirements, benefits, and how it works.
WHY and WHEN You Need to Register for VAT
In the UK, VAT is a tax added to most goods and services. If your taxable turnover is more than £90,000 in a year, you must register for VAT. Keep in mind, this threshold can change, so check the latest updates from HM Revenue and Customs (HMRC).
What does turnover mean?
Turnover is the total money your business makes from selling goods and services, before any costs or expenses. If your turnover exceeds £90,000, you need to register for VAT.
You can also register voluntarily, even if your turnover is below this amount. This can make your business look more professional and allows you to reclaim VAT on business expenses, though it comes with more paperwork.
It’s important to register as soon as you exceed the threshold to avoid penalties. It’s also a good idea to monitor your turnover closely so that you can register on time. So you might see a trend that shows around £7000 to £8000 per month invoiced. This is where you need to think about if you are going to have to start registering for VAT.
WHAT VAT Means for Your Business
1. WHERE is VAT charged
Once VAT-registered, you’ll need to charge VAT on materials and services. The standard rate is 20%, but some construction services may have a reduced rate or exemption. Check with HMRC to make sure you’re applying the right rate for your services.
Here is a link to HMRC where there might be different rates applicable around construction. Most of you will find, your are in straight 20% rule, but just in case here is a link to the exceptions.
Read more on VAT for construction from HMRC
VAT on Job Materials & Services
When you buy materials/service, your supplier may have already added VAT if they are VAT registered. By charging VAT to your customers, you pass on that cost, but you can also reclaim VAT on materials used for VAT-eligible projects, helping to offset costs.
So what is a service in this context, you might get a plumber in to do the plumbing on a bathroom refurbishment, or an electrician to wire up the new electrics for the bathroom. These are services you might bring in as part of your jobs/ projects.
Here is a simple sample:
You bought some wood for £120 from your local timber merchant who is VAT registered, this is broken down to £100 and £20 for VAT.
If you are tax registered or not, the expense you charge on is £120 to the customer. So no change here.
Exception is your own mark up – i.e. you not passing on the rebates and discounts to the customer you are receiving from the merchant. This value is treated like a new service and is taxable as such.
VAT on your Services (Labour)
You must also charge VAT on your own business labour and services. VAT-registered clients can reclaim this, but non-VAT customers will see the cost increase. Understanding how this affects pricing will help you manage customer expectations.
Lets take a look at a simple sample again:
Your hourly rate is £25 and you worked 4 hours, so the total for your job is £100.
If you are not tax registered this is what you would charge on.
If you are tax registered we need to add 20% the your job total, so we now have £100 (Labour) + £20 (VAT) = £120 to be invoiced.
So pretty simple… your labour and services your provide is actually the one which increases to the customer.
There is a third component beside the job materials/service, your labour and that is anything you buy for the business. Lets check these out.
VAT on Service and Products for your business
VAT-registered businesses can reclaim VAT on qualifying expenses, such as:
- Equipment, tools, and software (e.g., Craeftig, QuickBooks).
- Office supplies, subscriptions, and utilities.
- Professional services, including accountants, consultants, and marketing experts.
So essentially your business expenses are reduce by the value of the VAT. You are offsetting the VAT from the business expenses with your invoiced VAT on your tax return.
Did you know you can claim VAT back on items you purchased prior to you going VAT Registered:
- Goods purchased up to 4 years prior(still in use).
- Services bought up to 6 months prior.
Example: If you spent £1200 on equipment and services in the past (keep in mind those timelimits above), you could reclaim £200 VAT upon registering. So keep those receipts for your business handy.
2. VAT Returns: When, How, and What
VAT-registered businesses are required to submit VAT returns, typically on a quarterly basis. These returns summarize:
- The VAT you’ve charged on sales (output tax)- so this is what you’ve invoiced
- The VAT you’ve paid on purchases (input tax) – this is the value of the materials, assets, subcontractor etc you bought in for the business over the month
The difference between these amounts determines whether you owe VAT to HMRC or are entitled to a refund. Accurate record-keeping is essential to ensure compliance and to facilitate the preparation of these returns.
Learn about VAT returns
Managing VAT can be tricky, but there are two schemes that can make it easier and you will need to consider carefully which fits to your business.
A. Flat Rate Scheme
This allows you to pay a fixed percentage of your turnover as VAT, reducing the need to track VAT on individual purchases. However, under this scheme, you cannot reclaim VAT on most purchases. This percentage varies by industry but is typically lower than the standard VAT rate.
To be eligible, your business must have a VAT turnover of £150,000 excluding VAT, or less, per year. (so it isn’t as simple as it looks an the outset and also can cost you money if you have a lot of expenses in the business)
Who Might Benefit from the Flat Rate Scheme?
- Businesses with low VAT on expenses: If your business doesn’t make many purchases that attract VAT, the scheme can save time and potentially reduce VAT liability.
- Predictable sales: For businesses with steady turnover, a fixed VAT rate is easier to manage.
- Smaller businesses: The time saved on administration can be significant for sole traders or small companies without dedicated accounting teams.
This might not be the best scheme for construction sole traders or small businesses as we often see a lot of outlay in expenses for jobs or the business. So it isn’t as simple as it looks in the outset and also can cost you money if you have a lot of expenses in the business.
B. VAT Cash Accounting Scheme
With this approach, you account for VAT based on actual payments received and made, which can aid cash flow management.
Whilst you may face some additional administration effort, it can be of greater benefit to your business to use this scheme.
The biggest benefit of the VAT Cash Accounting Scheme is its help to manage cash flow better. You only pay VAT on money you’ve actually received, not on unpaid invoices. This means you won’t have to pay VAT upfront on jobs where customers haven’t paid yet, reducing financial pressure. This scheme also helps businesses plan for VAT payments and keep better track of their finances.
Choosing the right scheme depends on your business’s specific circumstances, so it’s advisable to consult with a tax professional or your accountant.
Handy Tips to Simplify your VAT Returns
Tip 1: Dedicated bank account for VAT
Set up a separate bank account and put all the VAT associated to your invoices in here.
Benefit:
- No more scrambling finding the money to pay the VAT
- You will have a bit of a cash reserve by the end of the year – so maybe take out the team for a BBQ
Tip 2: Keep those receipts and invoices
Keep those receipts for all the things you buy as part of your business as they are offset against the invoices VAT and they lower your overall income for income tax if you’re a soletrader or corporation tax declarations. So a win-win!
The Impact on Your Customers
When you’re VAT registered, you need to add VAT to your invoices. This can increase costs for customers:
- VAT-registered clients won’t be affected much since they can reclaim the VAT.
- Non-VAT customers (like private individuals) will see a higher price, especially on services but as seen above you materials don’t really change.
Communicating these changes clearly with customers will help them understand the impact. It’s as simple as sending an email explaining the changes can help build trust and keep customers informed.
Future Outlook: Potential Changes to Registration Limits
VAT registration thresholds are subject to periodic review by the government. There is ongoing discussion about lowering these limits, which could compel more small businesses to register. Staying informed about potential legislative changes is crucial for proactive planning and compliance.
Summary and Next Steps
Becoming VAT-registered can improve your business’s professional image and help you reclaim VAT on purchases. However, it requires careful record-keeping and may affect your pricing.
At Craeftig, we help businesses like yours navigate VAT registration and ensure compliance. Our solution makes the transition easy, allowing you to focus on running your business.
Contact us today to see how Craeftig can simplify your move from non-registered to registered VAT business.
Craefitg can help with just a click, making the change to VAT registered hassle-free.
