Why VAT in construction should be on your radar

Jan 14, 2025 | Uncategorized

When you’re running a construction business, the last thing you want is extra hassle. You’re already juggling materials, staff, subbies, and clients who can’t decide if they want that wall moved a foot to the left or not. But there’s one thing that keeps rearing its head – and if you ignore it, it could cost you big time. That thing is VAT.

Now, I know what you’re thinking. “We’re just a small outfit,” or “I’m barely cracking the VAT threshold.” And you might be right – but you’d be surprised how fast your revenue can creep up once you factor in all those separate contracts across the year. And if you cross that threshold without realising, HMRC won’t care that you “didn’t know.” They’ll chase you for the backdated VAT and any interest or penalties they fancy adding on top. Not fun!

Let’s face it: we’d all rather spend our days on-site than behind a stack of receipts. But if you’re serious about growing (and not having HMRC breathing down your neck), then you need to know how VAT applies to you. So, here’s the lowdown on why VAT should be on every UK construction business’s radar.

Here’s the breakdown

The problem: Most construction businesses don’t keep up with VAT or think it doesn’t apply, which can lead to nasty surprises down the line.

What happened: Failing to register on time or account for VAT properly can lead to penalties from HMRC. If you’re not careful, you could be paying thousands more than you need to, which could batter your profit margins!

How to fix it: Get the right information and support from accountants who live and breathe construction. We’ll handle the faff, keep your books tidy, and give you peace of mind so you can focus on the job at hand.

Why VAT matters

VAT isn’t just some number you slap on an invoice for fun. It affects cashflow, pricing, and how you’re perceived by suppliers and clients. Here in the UK, the standard rate is 20%, and once you’re registered, you’ve got to charge that rate (except where a reduced or zero rate might apply – but let’s keep it simple).

If you don’t register when you’re supposed to, or if you register late, HMRC can do more than just rap your knuckles. They can charge interest and, in some cases, fines that’ll make you sweat! Meanwhile, if you charge VAT when you’re not supposed to, you could land in hot water too. This is why getting it right from day one – or sorting out any confusion now – is so important.

According to the Office for National Statistics, construction accounted for nearly 7% of the UK’s total economic output last year. That’s a decent chunk of the economy, which explains why HMRC keeps a beady eye on the construction sector. They want their cut, and they want it properly recorded.

The VAT threshold 

For the current tax year, HMRC has kept the VAT registration threshold at £90,000 in taxable turnover. You must register if your total VAT-liable turnover in any rolling 12-month period goes over £90,000. And remember, it’s not just one tax year or calendar year – it’s any 12 months in a row. So if you’ve had a bumper few months on a big site, don’t let your guard down thinking it’s someone else’s problem.

When you register, you’ll charge VAT to your customers, which might mean tweaking your quotes. Some clients will grumble about the extra cost, but it shows you’re legit. As a bonus, you can reclaim VAT on some of the goods and services you buy for your business (subject to HMRC’s rules, mind). If you don’t register on time or “accidentally” keep your turnover under the threshold by shuffling invoices, you might just be opening the door for an HMRC investigation. So it’s better to play it safe, eh?

Domestic reverse charge for construction

If you thought you had enough on your plate, there’s also the domestic reverse charge for VAT in the construction industry. This means that the customer (rather than the supplier) is responsible for accounting for VAT for certain construction services.

Now, let’s not get bogged down in the finer details of who accounts for what in every possible scenario – that’s exactly why we’re here! But the short version is: if you supply construction services to another contractor who’s VAT-registered and the work falls under the Construction Industry Scheme (CIS), then you might not be the one charging the VAT on your invoice. Instead, you’d put a note on the invoice saying “reverse charge applies,” and your client will sort out the VAT on their end.

This reverse charge was brought in to tackle sector fraud and ensure people aren’t fiddling with their numbers. If you get it wrong – by applying the charge when you shouldn’t, or not applying it when you should – you risk a bunch of accounting headaches and potential penalties. So, if you’re ever unsure, just give us a ring, and we’ll talk you through it.

Making life easier with digital tools

If you’ve not heard about Making Tax Digital (MTD) for VAT, where have you been hiding? It’s been rolling out for a while, and for 2024/25, you’re definitely on HMRC’s radar if you’re VAT-registered. Under MTD, you have to keep digital records and submit your returns using compatible software.

This might sound like extra hassle at first, but trust me, once you’re used to it, it’s handy as owt! You’ve got all your records in one place, you can reduce errors (like losing the million receipts stuffed in your van’s glove box), and you can see your tax position in real time. That’s a game-changer if you’re trying to plan ahead or budget for that new piece of kit you’ve had your eye on.

Penalties and interest

HMRC aren’t shy about clamping down on those who don’t play by the rules. If you file a late return, you can face penalty points, and if you build up too many points, you’ll get a fine. If you underestimate VAT or forget to declare certain sales, you can land interest charges on the extra amount owed. These costs can pile up, eating into your hard-earned profit and causing a right headache.

A 2023 report from HMRC highlighted that penalties for late or incorrect submissions cost UK businesses millions each year. So it’s not just a few unlucky souls who get caught out. You don’t want to be on that list, mate!

Who needs to take VAT more seriously?

Everyone in construction, to be honest. That includes sole traders, partnerships, and limited companies. You might think you’re “just a little guy,” but you can easily tip over the threshold if you land a few decent contracts or work with a bigger contractor under CIS. And once you’re over, the “Oh, I didn’t realise” excuse won’t wash with HMRC.

Even if you’re well below the threshold, you might choose to register voluntarily if it means you can reclaim VAT on your expenses. It can make you look more professional too. The main thing is, don’t wait till you’re knee-deep in trouble. Sort it before it sorts you!

We’ll keep you right

Look, the UK tax rules change every now and then, and HMRC doesn’t mess about. But you don’t need to be an accounting whizz yourself. Our team at For The Trade specialises in the construction sector, and we’re proud to say we talk your language – none of that highfalutin nonsense. We’ll help you figure out if you should register, how to register, and how to sort your invoices so the VAT man’s happy.

We’ll also chat to you about MTD, show you the right software, and make sure you don’t slip up on the domestic reverse charge. And best of all, we’ll do it in plain English (with the odd Geordie expression thrown in for good measure). Sound good?

Don’t wait till you’re behind the eight ball

Whether you’re just starting out or you’ve been in the trade for years, VAT is something you need to keep on your radar. It’s not just for the big fish; it can bite anyone who’s not prepared. So give us a call or drop us a line through our website at For The Trade. We’ll take the stress away, keep you on HMRC’s good side, and help you crack on with what you do best: building stuff!

Cheers for reading!

Need help with your UK construction business’s VAT?  Get in touch with us.

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