Understanding how VAT can be your friend, when “to go VAT registered”, the Domestic Reverse Charge (DRC), and VAT on energy-saving products are all common questions I see pop up weekly across social media.
Hey, I’m not an accountant, so to help with this month’s article, I contacted Aaron McLeish, the only specialist accountant in the plumbing industry, author of “The Quote Handbook,” and asked him to explain.
The New VAT Threshold
Businesses must register for VAT if their VAT-liable turnover exceeds £90,000 within any rolling 12-month period. This could span from 15th March one year to 14th March the next or from 1st August to 31st July. The period is flexible and can shift throughout the year.
The VAT threshold is now set at £90,000 over 12 months, which equates to an average turnover of £7,500 per month. Once a business is VAT registered, it must charge VAT on its sales to customers but can reclaim the VAT paid on its purchases from suppliers. The mechanism ensures that the VAT collected from customers is balanced against the VAT paid to suppliers. If you collect more VAT from customers than the VAT you have paid on your purchases, you pay the extra amount to HMRC. Conversely, if you’ve paid more VAT than you’ve collected, HMRC will refund you.
Domestic Reverse Charge (DRC)
The DRC is a special rule within the UK’s VAT system, primarily affecting businesses in the construction industry. It’s like a baton-pass in a relay race, where businesses pass the responsibility of handling VAT to their customers.
Imagine you run a construction business providing services to another construction business. Traditionally, you’d add VAT to the sales invoice, collect it from your customer, and pass it to the government. However, with the DRC, you skip adding VAT to your invoice. Instead, you inform your customer that the DRC applies. If your customer is VAT registered, they will account for it themselves. They report both the VAT they would have paid on your services and the VAT they would have claimed back on their VAT return. Essentially, the customer handles the VAT, which is your responsibility.
VAT Can Be Your Friend!
VAT doesn’t have to be a burden; it can actually work to your advantage! Strategically managing VAT can make a significant difference, especially if you primarily provide services to main contractors. Even if your turnover doesn’t reach the VAT threshold, opting for VAT registration can be beneficial due to the DRC mechanism when invoicing main contractors. This allows you to reclaim VAT on your expenses, potentially leading to refunds with each VAT return.
There’s an additional perk for those installing energy-saving measures, as specified under VAT notice 708/6. While you pay 20% VAT on materials, the rate charged to the end-user for supply and installation can be significantly lower, at either 0% or 5%. This discrepancy means you’ll often find yourself in a refund position due to the lower VAT collected from customers compared to the higher VAT paid on purchases.
Viewing VAT positively is vital. It’s an indicator of your business’s success and growth. However, prudent cash flow management is essential. If you’re submitting VAT returns quarterly, allocate funds monthly in anticipation of the VAT bill. This approach prevents the bill from becoming an overwhelming financial burden when due.
Timing is everything, especially when it comes to major purchases. Buying significant items towards the end of a VAT quarter can expedite VAT reclaim, improving your cash flow.
Being savvy with VAT not only aids in cash flow management but also simplifies business operations. Yet, the realm of VAT is complex, and when considering registration, consulting with your accountant is always the best course of action. Keep a close watch on your turnover; consistently exceeding £7,500 a month signals it’s time to consider VAT registration.
For a typical plumbing and heating business, selling 2-3 boilers a month, not to mention maintenance work, means VAT registration is almost inevitable for those committed to their business’s growth.
Understanding the benefits and requirements of VAT, including the DRC, can significantly enhance your business operations and financial management. Always consult with your accountant to navigate the complexities of VAT and ensure you’re making informed decisions that benefit your business.
Aaron McLeish
Connect with Aaron McLeish on Facebook & Linked-in or find out more on the Together We Count website
The Boiler Business
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Tom Lee-Zmuda
Hey buddy. My name is Tom, a former heating engineer turned marketing Jedi. My team and I specialise in helping local HVAC and Solar business owners dominate Google and sell their most profitable services. We are committed to building the best ROI through local SEO, kick-ass websites & sales communications that attract, sell and keep your best five-star customers.
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