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
- the input tax you have paid on your purchases of materials and so on
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 or zero rate?
Standard rated goods and services have VAT of 20% added to the selling price while zero rated goods and services do not have to have any VAT (0%) added to the selling price. If you are registered for VAT you might undertake a mix of standard rate and zero rated work.
Zero rated services can include, for example, installing walls and fences for newly built houses. Most other types of fencing work are likely to be standard rated for VAT.
Full details are available in the publication Notice 708 Buildings and Construction, which is available along with many other VAT publications on the Gov.uk website. If you have a specific query about VAT and your business you can contact the HMRC VAT Helpline on 0300 200 3700. VAT can be a complex subject and it is recommended that you seek the advice of a suitably qualified professional adviser, particularly on issues such as zero rating.
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 flat rate percentages in Notice 733, Flat rate scheme for small businesses. It will help you to decide whether or not the scheme is suitable for you.
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.
Small fencing businesses and VAT
It would be pretty good going for a 'man in a van' fencing contractor working alone (or with a labourer) to turn over more than the VAT threshold in a year - particularly if customers supply most of the materials, or much of the work involves relatively inexpensive materials (such as stock fencing). 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.