VAT is the part of the paperwork most likely to cost you money quietly. Not through a dramatic mistake, but through pricing a job as though the VAT was yours, or invoicing with VAT on a job where you should not have, and finding out a year later.
This is the working knowledge, in the order it matters. It is general guidance rather than tax advice, and VAT is genuinely complicated at the edges, so treat anything with real money in it as a question for your accountant or HMRC rather than for an article.
Do you have to register?
You must register for VAT when your VAT-taxable turnover over any rolling 12-month period goes past the registration threshold, or when you expect to pass it in the next 30 days on its own.
The threshold was raised to £90,000 from 1 April 2024, with the deregistration threshold at £88,000. Those numbers move at Budgets, so check the current figures on GOV.UK rather than relying on a figure you saw in a WhatsApp group.
Two things people get wrong:
It is a rolling test, not a tax year test. You are not checking your accounts in April. You are checking every month, looking back over the previous twelve. A busy summer can take you over in September.
It is turnover, not profit, and it includes materials. If you supply and fit, the materials are part of your taxable turnover. A tradesperson doing a lot of supply-and-fit work reaches the threshold far sooner than one selling labour only, on the same take-home pay.
Should you register voluntarily?
Sometimes. If you work mainly for VAT-registered businesses, registering is close to free: they reclaim the VAT you charge, and you reclaim the VAT on your van, tools and materials.
If you work mainly for householders, registering makes you effectively 20 per cent more expensive overnight to a customer who cannot reclaim anything, and the input VAT you recover rarely covers it. That is exactly why many domestic tradespeople sit deliberately below the threshold.
Presenting VAT to a domestic customer
A householder cares about one number: what leaves their bank account.
Lead with the VAT-inclusive total. The Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 require consumers to be given the total price including taxes before the contract is made, and it is also just fair dealing. A quote presented as “£4,200” that turns into £5,040 on the invoice is the fastest way to a complaint, and potentially a misleading-price problem under the Consumer Protection from Unfair Trading Regulations 2008.
A clean layout:
Subtotal (excl. VAT) £4,200.00
VAT @ 20% £840.00
Total payable £5,040.00Make the last line the biggest one.
If you are not registered, say nothing about VAT. No VAT line, no VAT number, no “prices exclude VAT”. Charging or appearing to charge VAT when you are not registered is a serious problem, not a presentational one.
Presenting VAT to a business customer
Commercial customers work in net figures because they reclaim the VAT. Lead with the price excluding VAT, show the VAT separately, and put your VAT registration number on the document.
If you are also a construction subcontractor working for a contractor, the next section is the one that matters.
The rate is not always 20 per cent
Most trade work is standard-rated at 20 per cent. Some is not, and the exceptions are worth real money on the right job.
Zero rate (0%) applies to the construction of qualifying new dwellings. A builder constructing a new house does not charge VAT on those services.
Reduced rate (5%) can apply to things like converting a property to change the number of dwellings, and renovating a dwelling that has been empty for two years or more. On a large refurbishment that is a substantial difference to the customer, and knowing it exists can win you the job.
Energy-saving materials have had their own treatment: the installation of qualifying energy-saving materials in residential accommodation has been zero-rated in Great Britain for a temporary period, reverting to the reduced rate afterwards, with a slightly different position in Northern Ireland. The scope and the dates have been changed more than once, so check the current VAT notice before pricing.
The conditions on all of these are detailed and getting them wrong is expensive in both directions. Read the relevant VAT notice on GOV.UK, and get your accountant to confirm before you price a large job on a non-standard rate.
The domestic reverse charge for construction
This one catches people out constantly, so take it slowly.
Since 1 March 2021, VAT on many business-to-business construction services is accounted for by the customer rather than by the supplier. If it applies, you invoice with no VAT added, and your customer declares both the output and the input VAT on their own return.
When does it apply?
Broadly, all of the following have to be true:
- the supply is of construction services within the scope of the Construction Industry Scheme
- the supply is standard-rated or reduced-rated (zero-rated supplies are excluded)
- both parties are VAT registered
- the customer is registered for CIS
- the customer is not an end user or an intermediary supplier
What is an end user?
An end user is a customer who receives the construction services for themselves and does not make onward supplies of construction services. A property owner or a developer occupying or selling the finished building is typically an end user, and so is every domestic customer.
End user status has to be notified to you in writing. If a customer tells you in writing that they are an end user, you charge VAT normally. If they do not tell you, and the other conditions are met, the reverse charge applies. This is why builders’ merchants of paperwork exist: get the statement in writing and keep it with the job file.
What the invoice has to say
Your invoice must contain everything a VAT invoice normally needs, and must additionally make clear that the reverse charge applies and that the customer is required to account for the VAT. You show the VAT rate or the amount of VAT, but you do not include it in the total charged.
Wording along the lines of “Reverse charge: customer to account to HMRC for the VAT” is what HMRC’s guidance contemplates. Check the current wording examples in the reverse charge technical guide on GOV.UK.
What it does to your cash flow
This is the part nobody warns subcontractors about. Before the reverse charge, the 20 per cent VAT sat in your bank between invoice and VAT return, and a lot of small firms used it, consciously or not, as working capital.
Under the reverse charge you never receive it. Your income drops by a fifth in cash terms overnight while your costs stay the same. If you are a subcontractor moving into reverse charge work for the first time, plan for that gap before it happens.
The upside is that you are now often in a repayment position, and you can apply to file monthly VAT returns to get the money back faster.
The Flat Rate Scheme
Reverse charge supplies are excluded from Flat Rate Scheme turnover. Because a flat rate percentage is calculated on gross turnover including VAT, a subcontractor whose work moved to reverse charge can find the scheme no longer works in their favour. Many left it. If you are on the FRS and doing reverse charge work, ask your accountant to check the arithmetic on your actual figures.
CIS is a separate thing
Do not confuse the two.
CIS is income tax. A contractor deducts a percentage from a subcontractor’s payment and passes it to HMRC on their account. The standard deduction is 20 per cent for a subcontractor registered under the scheme and 30 per cent for one who is not, with gross payment status available to those who qualify. Crucially, the deduction is applied to the labour element only, not to materials, which is one very practical reason to itemise your materials clearly.
The reverse charge is VAT, and moves who accounts for it.
A single job for a contractor can involve both: a CIS deduction from the labour, and a reverse charge treatment of the VAT.
What to put on the estimate
- Your VAT number, if you are registered
- A clear statement of whether the prices shown include or exclude VAT
- For domestic work, the inclusive total as the headline figure
- For non-standard rates, a note of the rate applied and why
- For reverse charge work, a note that the reverse charge will apply and that the customer should confirm their end user status in writing
The mistakes that cost money
- Pricing a job as though the VAT is yours. It is not, and on a job with heavy materials it is a large sum passing through.
- Missing the rolling threshold. Late registration means paying VAT you never collected.
- Charging VAT on a reverse charge job. Your customer’s return is wrong, they will bounce the invoice, and you will be paid late.
- Charging VAT with no end user statement on file. The absence of the statement is what triggers the reverse charge.
- Assuming 20 per cent on a conversion or an empty-property renovation. You may be quoting 15 per cent more than a competitor who checked.
Once you know your position, applying it should be mechanical rather than something you think about at the end of every job. TradeScribe carries your VAT status and rate through every estimate it writes from your notes, so the totals come out the right way round for the customer you are actually quoting.