VAT for tradespeople: a simple guide

Do I need to register for VAT?#

VAT registration is compulsory once your taxable turnover exceeds the threshold. As of April 2024, you must register if:

• Your taxable turnover exceeded £90,000 in the last 12 months, or
• You expect your taxable turnover to exceed £90,000 in the next 30 days alone

Important: This is a rolling 12-month figure, not your tax year. Check your turnover regularly, especially during busy periods.

Voluntary registration#

You can register for VAT voluntarily even if below the threshold. Reasons to consider this:

• Reclaim VAT on purchases: If you spend a lot on materials, tools, or vehicles, you can claim this back.
• Appear more established: Some commercial customers prefer VAT-registered suppliers.
• Approaching the threshold: Register early to avoid a rush when you hit £90,000.

However, if most of your customers are domestic (not VAT registered themselves), adding 20% to your prices makes you less competitive.

How VAT works in practice#

Charging VAT (output VAT)#

Once registered, you must add VAT to your invoices:

• Work out your net price (what you would charge without VAT)
• Add 20% for standard-rated services
• Show both figures plus the total on your invoice

Example:

• Labour and materials: £1,000 (net)
• VAT at 20%: £200
• Total: £1,200 (gross)

Reclaiming VAT (input VAT)#

You can reclaim VAT on business purchases:

• Materials from trade suppliers
• Tools and equipment
• Vehicle costs (fuel, servicing, purchase/lease)
• Business insurance
• Professional services (accountant, software)

Keep all VAT receipts. You need valid VAT invoices showing the supplier's VAT number to reclaim.

Paying HMRC#

Each quarter (usually), you calculate:

• VAT you charged customers (output VAT)
• Minus VAT you paid on purchases (input VAT)
• Equals what you owe HMRC (or they owe you)

If input VAT exceeds output VAT (common when making large purchases), HMRC will refund you.

VAT rates for trade services#

Standard rate (20%)#

Most trade work is charged at 20%:

• General electrical work
• Plumbing and heating
• Building and construction
• Painting and decorating
• Most repairs and maintenance

Reduced rate (5%)#

Some residential work qualifies for 5% VAT:

• Energy-saving materials (insulation, solar panels, heat pumps)
• Certain works on empty residential properties
• Converting non-residential buildings to dwellings
• Renovating properties empty for 2+ years

Note: The rules are complex. Check with HMRC or your accountant if you think reduced rate applies.

Zero rate (0%)#

Very limited for trade work. Mainly applies to:

• New build residential construction (for approved builders)
• Certain works for disabled persons

VAT on quotes and invoices#

Quotes#

Always make clear whether your quote includes or excludes VAT:

• Best practice: Show net price, VAT, and total separately
• Minimum: State clearly "plus VAT" or "including VAT"

Domestic customers focus on the final price they pay, so showing the VAT-inclusive total avoids confusion.

Invoices (legal requirements)#

VAT invoices must include:

• Your business name and address
• Your VAT registration number
• Invoice date and unique invoice number
• Customer name and address
• Description of goods/services
• Net amount (excluding VAT)
• VAT rate applied
• VAT amount
• Gross total (including VAT)

Invoicing software like SortedMate handles this automatically, ensuring your invoices are VAT-compliant.

The Flat Rate Scheme#

The Flat Rate Scheme simplifies VAT accounting:

• Pay a fixed percentage of your gross turnover to HMRC
• No need to track input VAT on every purchase
• Less paperwork, simpler returns

Flat rates for common trades (2024):

• Electrical/plumbing: 9.5%
• General building: 9.5%
• Painting/decorating: 9.5%

Important: You still charge customers 20% VAT, but you pay HMRC the flat rate percentage. The difference is your "profit" (or sometimes loss, depending on your expenses).

Is flat rate right for you?#

Flat Rate works best if:

• Your business expenses are low
• You value simplicity over maximum savings
• You do not make large capital purchases regularly

It may not suit you if:

• You spend a lot on materials relative to labour
• You buy expensive equipment regularly
• Your reclaimed VAT would exceed the flat rate you pay

Do the maths: Compare what you would pay under each scheme for a typical quarter.

Common VAT mistakes#

• Missing the registration threshold: Monitor your rolling 12-month turnover. HMRC penalties for late registration are painful.
• Not keeping VAT receipts: You cannot reclaim VAT without valid invoices. Keep everything.
• Confusing gross and net: Make sure your accounting software and invoices are consistent.
• Ignoring Making Tax Digital: VAT returns must be filed digitally using compatible software.
• Wrong VAT rate: Using 20% when 5% applies (or vice versa) creates problems for you and your customer.

Next steps#

1. Check your turnover: Are you approaching the £90,000 threshold?
2. Register if needed: Do this through the HMRC website. It takes about 4 weeks.
3. Choose your scheme: Standard or Flat Rate? Consider your expenses.
4. Set up proper invoicing: Use software that handles VAT calculations automatically.
5. Keep good records: All VAT invoices, receipts, and returns.

Disclaimer: This guide provides general information. For advice specific to your situation, consult a qualified accountant or check the HMRC website.