There are many challenges for installers outside of just knowing how to do the job. Benjamin Dyer, the CEO and co-founder of Powered Now, looks at one of them – dealing with VAT.
VAT stands for ‘Value Added Tax’, and all VAT-registered installers have to add it to their sales invoices. For example, an installer does a job where they buy £10,000 of materials with £2,000 VAT at 20% added, giving a total materials bill to be paid of £12,000. They do £5,000 worth of labour so they charge the customer £10,000 + £5,000 = £15,000 then add £3,000 VAT at 20%, giving a total bill to the customer of £18,000.
It seems like the installer is £2,000 out of pocket, but this isn’t the case. The installer only has to pay HMRC £3,000 (the VAT received from the customer) – £2,000 (the amount paid to the supplier) = £1,000, so they get the full £5,000 for their labour.
Using the same example, a non-VAT registered business would charge the customer £12,000
(the amount they paid for materials including VAT) + £5,000 (the amount for their labour) = £17,000. This is £1,000 less than the VAT registered installer for the same work and pay.
This gives the non-VAT registered business a competitive advantage.
1: What is the ‘VAT threshold?
Any business, whether run by a sole trader, partnership or limited company, may potentially have to register for VAT with HMRC. They must start charging VAT within 30 days of their 12 months trailing sales going over the VAT threshold – currently £85,000. They also need to file a quarterly VAT return and make quarterly payments to HMRC – normally one calendar month and seven days after the end of each quarter.
2: What VAT rate should installers use?
There are four different VAT rates that can be applied to the sales of goods or services in the UK:
- Standard Rate (20%)
- Reduced rate (5%)
- Zero (0%)
‘Exempt’ is the least relevant to installers. Examples of things that are exempt from VAT are postage stamps, financial and property transactions, insurance, credit, education and training.
VAT for most work on houses and flats by builders and other trades is generally charged at the standard rate of 20%. In particular, any construction work on an ordinary house or flat not specifically given a special rate is standard rated. This includes building an extension, annex or granny annex, converting a loft, and carrying out repairs or renovations, as well as installing a central heating system.
Unfortunately, there are many exceptions – and construction generally has the most complex rules relating to VAT. New-build is usually zero-rated, whereas some conversions and refurbishments are rated at 5%.
Other items that have lower rates of VAT are the installation of energy-saving materials or devices, and installations related to people’s disabilities.
The reduced rate benefits the end customer, but this also gives a competitive advantage if the other installers can’t figure things out. It is down to the installer to establish the correct rate of VAT that is applicable for each job, and usually advice from an accountant on how this works can really help detail if there’s a chance of charging a lower rate.
3: What is the disadvantage of VAT?
VAT presents a major problem for a growing small business. A business that isn’t VAT-registered can’t claim the VAT back on materials such as boilers, so these have to be passed on to the end customer. However, once a business exceeds the VAT threshold, it adds 20% to the labour cost and profit as charged to the customer.
4: How can VAT be minimised?
The obvious way to minimise VAT would be to run multiple companies – each of which traded under the VAT limit. Unfortunately, the law doesn’t allow this. Setting up “Installer North East London”, “Installer North London”, etc. to avoid VAT isn’t allowed, whether these are just trading names or separate companies.
When approaching the VAT threshold, the best way to avoid going over it is to get customers to pay directly for materials that will be used in the installation.
If a boiler is bought and the cost passed on to the end customer, it forms part of sales turnover whether or not a mark-up is added. There is a way to still buy major items and it not count towards turnover – disbursements – but this is quite complicated.
5: Choices of VAT scheme
The normal VAT scheme is where a business submits their VAT return once every three months based on sales invoices, supplier invoices and expenses that fell within that three month period. These are included based on the date they were raised – whether or not these have been paid.
6: Cash accounting scheme
The cash accounting scheme is an alternative to the standard scheme and means that a business only becomes liable to pay VAT based on invoices and expenses that are paid in the three month period. This is not a benefit if you generally get paid for invoices quickly.
The cash accounting scheme can only be joined if a business’s sales will be £1,350,000 or less in the next year. If sales in the last 12 months go over £1,600,000, they must leave the scheme at the end of the next quarter.
There is also a ‘flat rate scheme’ but, due to its complexities, there isn’t room to cover it in this article.
7: Accounting insight
The aim of this article has been to provide an overview of VAT to make any financial discussions more straightforward. Unfortunately, the rules are more complex when a business is small due to the choice of schemes, and even more complicated for installers due to the myriad of rules around reduced rate and zero-rated installations.
While it may seem another expense, once a business is a decent size the reality is that consulting an accountant usually saves much more than it costs.
For more info, please visit: www.powerednow.com