Electricians and VAT
You will have to register for VAT if your taxable sales are likely to be above the current VAT threshold. You will then have to charge VAT on your sales - this is known as 'output tax'. You will be able to reclaim any VAT you pay on purchases - this is known as 'input tax'.
Every quarter you will pay HM Revenue & Customs (HMRC) the difference between:
- the output tax you have charged, and
- the input tax you have paid on your purchases of goods and materials etc
Nearly all businesses have to pay their VAT bill electronically - for example by direct debit or online banking. HMRC allows you some time at the end of each quarter before you have to pay the VAT due. So, for example, the VAT due on sales made in months one, two and three would be paid at the end of month four. Your VAT return will show your payment deadline date.
Businesses that are having trouble making their VAT payments, or are worried that future payments will cause them problems, can ask for help from the HMRC Business Payment Support Service. If your business needs this financial assistance to tide it over, HMRC will look at your situation and discuss temporary options that could help out. These could include letting you make payments over a longer period and waiving late payment surcharges. To discuss payment problems with HMRC you can call the Business Payment Support Service Helpline on 0300 200 3835.
Standard rate, reduced rate or zero rate?
Standard rated goods and services have VAT of 20% added to the selling price while zero rated goods do not have to have any VAT added to the selling price. In addition, certain goods and services that you might supply may have VAT at the reduced rate of 5% added to the selling price. If you are registered for VAT you may well undertake a mix of standard rated, reduced rated and zero rated work.
Standard rated services can include:
- work on a new building that does not fall into one of the categories qualifying for zero rating
- repair and maintenance work
- with some exceptions, any work done to an existing building for example an extension, alteration or 'granny flat'
In some cases, for example the installation of certain energy saving materials like solar panels, VAT can sometimes be charged at a reduced rate of 5%. Do be aware though that the reduced rate only applies to qualifying energy saving materials, and they must be installed as the main job rather than as part of a larger job to which the standard VAT rate applies. It was intended in the Budget 2016 to increase the 5% VAT rate to the 20% rate to comply with EU law but the government later confirmed that all energy saving materials and installation (including solar panels, wind turbines and water turbines) will continue to be charged at the reduced rate of VAT.
The 5% reduced rate can also apply to certain types of residential conversion work - for example converting a building into a house or flats - and when renovating a house or flat that has been empty for two years.
If you're charging the reduced rate on energy saving products like solar panels then take care that you do so correctly. Where work such as roof strengthening and modification is agreed by HMRC to be 'ancillary' to the main supply of qualifying goods and materials then the whole job can normally be charged at the reduced VAT rate. However, if the installation is deemed to be ancillary to other standard rated works - or if it is not clearly the main aspect of the works - then the whole job must normally be standard rated. This would apply, for example, where solar panels are installed on a new extension at the time when it is being built and the installation is carried out along with other electrical work. This can be quite a complicated area of VAT, so if you anticipate getting involved with this type of work it would be wise to get clear advice from HMRC. They should also be able to advise you and your clients on a case by case basis if necessary.
Zero rated services can include:
- work on newly built houses, including the supply of certain appliances (for example water or space heaters)
- work for a disabled person following special alterations to their home (only some types of work qualify for zero rating)
- work on certain other qualifying buildings (for example a village hall) if you are the main contractor (not sub-contracting to another firm which has overall responsibility for the work)
Full details are contained in VAT Notice 708, Buildings and Construction, available to download from the Gov.uk website. VAT is a complex subject and it is recommended that you seek the advice of a suitably qualified professional adviser and/or contact the VAT Helpline on 0300 200 3700 if you have any questions.
Your market research will have helped you to estimate your sales income every month. Now you will have to decide what proportion of those sales might be standard rated so that you can estimate approximately how much VAT you will pay to HMRC every quarter.
Reverse charge VAT scheme
From October 2019 a new reverse charge VAT scheme for the construction industry applies. This is to tackle widespread "Missing Trader" fraud. The reverse charge scheme makes the customer instead of the supplier responsible for accounting for VAT on providing labour. The scheme doesn't apply to the final business or domestic customer but does apply to sub-contractors who supply workers to a main contractor.
Making Tax Digital (MTD) for VAT
Under HMRC's Making Tax Digital initiative, VAT-registered businesses with taxable turnover above the VAT threshold must keep records digitally and use special software to submit their VAT returns. You can find out more about MTD on the Gov.uk website.
Alternative flat rate scheme
You might be interested in an optional flat rate scheme (FRS) for eligible small businesses. Under this scheme you continue to issue tax invoices to VAT registered customers, but the VAT payable every quarter is calculated as a percentage of your VAT-inclusive turnover. You apply the appropriate flat rate percentage for your type of business. You can find full details of the FRS, who can use it, and the appropriate flat rate percentage for your business in VAT Notice 733, Flat rate scheme for small businesses. It will help you to decide whether or not the scheme is suitable for you.
Electricians and VAT
It would be pretty good going for a 'man in a van' electrician working alone to turn over more than the VAT threshold in a year. So you may not need to register for VAT. You won't be able to reclaim the VAT you pay on your purchases, but you won't have to charge VAT to your customers. And you'll be able to avoid the extra paperwork involved. Because it's up to you how many hours you work, if you had a really good year but didn't want to register for VAT you might decide to take an extended break or holiday to keep your turnover just below the threshold for that year.