OT(ish) - VAT registration - one for the builders

[David WE Roberts]

We are currently getting quotes from builders to do the major work on remodelling the back of our house. We plan for some DIY involvement but tearing the rear ground floor wall off the house and leaving the upstairs hanging on some variety of sky hook is not within our current ambitions.

First one has come in, and was {cough} how much? The builder is VAT regitered and the VAT was {COUGH -HOW MUCH?}.

We had another builder round to quote, who hasn't yet got back to us with a quote but he also passed the details onto a mate (checked with us) who came round to see us. This mate is not VAT registered.

Now the difference in a price, if you assume 50% labour and 50% materials, should be about 10% of the total between non-VAT registered and VAT registered. This can be the difference between just affordable and not affordable.

So is there a level of job which fits neatly with a non-VAT regitered builder, such that it gives a decent return but doesn't take them over the limit for VAT registration, and does the building community tend to steer the smaller non-VAT registered builders towards these jobs and keep the bigger jobs for the VAT registered crowd?

It does seem to make sense, and our non-VAT builder did tell us that has turned down at least one job because it would take him over the VAT threshold.

If this idea is valid (and it does seem to make some sense) then how does the small builder avoid VAT registration? As I see it there are a few main ways. (1) Take a large proportion of small jobs which keep you busy but don't break the budget. (2) Take larger jobs but space them out so you only work say 6-9 months of the year. (3) Take larger jobs but do them 'slow and steady' at a lower hourly rate for labour to keep occupied all year and keep a steady income without the temptation to spend the spare cash. This especially if you really enjoy the job so wouldn't know what to do with 3 months a year off.

I am ignoring any "do a few large jobs for the accountant/tax man and boost your take home with a steady stream of foreigners".

All in all, it seems there should be a 10% discount for using VAT unregistered builders. The only concern being if any decent builder will generate enough annual turnover to have to register for VAT.

Cheers

Dave R

[mogga]

What insurance & guarantees did they offer?

[larkim]

Agree on the turnover measure - if a builder can only bill about =A373k in the year before mandatory registration, and if you assume (as you are doing) that labour is 50% of his billing (including allowances for employers NIC, pensions (!?), etc) then the most that he can be extracting in equivalent salary is c. =A335k. Once he has a mate involved too, his salary would be closer to =A320k; not much for the risk of self employment, weather, rectification costs, etc etc.

Matt

[Robin]

FWIW many sole traders used to get their clients to buy the materials so the traders could quite legitimately avoid compulsory VAT registration. The clever ones even knew the formula to recite which meant they could legitimately buy the materials as agent for the client without the client needing to go anywhere near a merchant - and no doubt pocket their traders' discount :)

[Man at B&Q]

(4) Get the client to buy the materials. (5) Get the client to engage other trades individually. (6) Get the client to pay cash-in-hand. (7) Lie to HMRC.

MBQ

[David WE Roberts]

We are quite happy to source the materials through builders merchants - we already have a couple of 'Trade' accounts from previous projects. One additional way is to pay labourers directly (we discussed this with our non-VAT man but he said that as he was not registered this didn't matter). Two man band we are dealing with - so £20k a year is an interesting figure. Perhaps we will have to feed him as well to keep his overheads down ;-)

[The Medway Handyman]

Wimp :-)

VAT is chargeable on materials & labour, not just materials.

It is an utterly despicable tax IMO.

So would I.

That's how my business works. "Turnover is vanity, profit is sanity".

If I can make a good margin on something - like decking - I will buy the materials & mark them up. If I can't - say fence panels - I get the customer to buy them if possible.

If I hit the VAT threshold I would either have to charge 20% more - and become uncompetitive - or take 20% less & not earn what I want to.

Heaven forbid.

They have higher overheads. They can't reclaim VAT on fuel, tools, stationary & many other things.

Current threshold is £73K year, just over £6K a month.

[ARWadsworth]

Is dennis not our resident VAT expert?

[Roger Mills]

We know that! The point is that you'll have to pay VAT on the materials even if using a non-VAT registered tradesman - because he'll have to pay it and can't reclaim it. So you only save on the labour if he isn't registered for VAT.

[David WE Roberts]

Yes, that was the implied calculation.

20% VAT on everything 50% is materials so you have to pay VAT anyway. 50% is labour so you can avoid paying VAT if the supplier of labour is not VAT registered. So the saving is 50% of 20% - which is 10%. So the easy rule of thumb is that an estimate for the same materials and labour should be 10% cheaper if the supplier is not VAT registered. Simples :-)

[A.Lee]

However, if you take your 50/50 calculation, if the quotes are the same, then the VAT registered builder will be on the same profit as an unregistered one, as he claims back the VAT on money spent.

I dont think building the shell will be a 50/50 split though. It'll be more like 30/70 materials/labour, as the expensive part of building is the fitting out, rather than putting up the walls/floors/roofs.

[David WE Roberts]

I don't think so. If the quotes are the same, then one builder will be collecting VAT on the labour which will go straight through. I will be paying 10% to the government and the builder will be acting as an unpaid tax collector. Which means that for the same gross bill the VAT regitered builder will be keeping 10% less of the money.

[ARWadsworth]

Ouch

And all our NI contributions will pay for the heart attack treatment that you have just caused our dennis to suffer.

[Clive George]

Don't think so.

1000 quid quote, 500 quid materials.

VAT builder pays 500 for materials to supplier and sends 100 to the taxman (200 in less 100 out), leaving 400 quid for his labour/profit.

Non-VAT builder pays 500 for materials to supplier and sends 100 to the taxman, leaving 500 for his labour/profit.

Seems likely.

[David WE Roberts]

The key thing is profit for the builder :-)

Hmmm..... VAT reg. £500 materials + 20% VAT - £600 £500 labour and profit + 20% VAT - £600 Cost to punter - £1200.

Material cost £500 (VAT reclaimed) Labour cost and profit £500 (VAT passed on) Total gross revenue to builder £500

Non-VAT £500 materials + 20% VAT - £600 £500 labour and profit - £500 Cost to punter - £1100.

Material cost £600 (VAT not reclaimed) Labour cost and profit £500 Total gross revenue to builder £500

So the net return to the builder should be the same - you don't penalise the builder directly for being VAT registered. However you do penalise the customer for using a VAT registered builder.

If the VAT registered builder was to match the non-VAT registered builder he would have to knock £100 of his (labour + profit + VAT) figure which means he would have to reduce his labour costs and/or his profit.

It will be interesting to see what the split is between materials and labour. If it is 30/70 then the non-VAT quotes should be significantly cheaper. The VAT registered builder also gets to claim back less VAT.

Material costs will be significant because they will include bi-fold doors, a new boiler, and a complete flue for a wood burning stove, a veranda and a fibreglass balcony with glass surround and stainless steel rails.

Cheers

Dave R

[Man at B&Q]

You maen it wasn't terminal?

MBQ

[David WE Roberts]

and one more thing. First suggestions of time were 6-8 weeks (no mention of number of people) and 12 weeks from 2 man outfit. So let us guesstimate that the labour is about 24 man weeks Which is 120 man days. Let us assume a price of £200 per man day to cover labour. That would give a rough labour cost of £24,000. If this was 70% of the cost I would be over the moon :-)

[Man at B&Q]

You VAT calculation is incorrect.

VAT registered builder charges =A31000 inc. VAT (=A3833 + 20%). Pays =A3500 inc. VAT and pays a further =A383 VAT to HMRC. =A31000 - =A3500 - =A383 =3D= =A3417

Pays =A3500 inc. VAT. =A31000 - =A3500 =3D =A3500

MBQ

[Man at B&Q]

You really do need an accountant.

MBQ

[Bill Wright]

The builder could be on a VAT scheme where he doesn't reclaim the tax on his inputs, charges VAT at 20%, but pays it to HMRC at a lower rate. Lots of small traders are on such a scheme.

Bill