When to Become VAT Registered

For a Plumbing and Heating Business

Firstly it's important to know that VAT stands for Value Added Tax. It's a type of consumption tax that is applied to the cost of goods and services at each stage of production, distribution, and sale to the end consumer. If you're in the UK, you'll see VAT added on to the price of most things you buy.

Businesses are required to register for VAT if their VAT-liable turnover exceeds £90,000 within any rolling 12-month period. This means your financial assessment could span from 15th March one year to 14th March the following year, or from 1st August to 31st July, for example. Essentially, this period is flexible and can shift throughout the year.

With the threshold set at £90,000 over 12 months, as outlined in the Spring Budget of 2024, this equates to an average turnover of £7,500 per month. Upon becoming VAT registered, it becomes mandatory for businesses to charge VAT on their sales to customers. However, they are also entitled to reclaim the VAT paid on their purchases from suppliers. The mechanism is such that the VAT collected from customers is balanced against the VAT paid to suppliers. If you collect more VAT from customers than you've paid on your own purchases, you send the extra amount to HMRC. On the other hand, if you've paid more VAT than you've collected, HMRC will give you a refund. This way, your business only pays or gets back the difference in VAT, making sure you're only dealing with the actual VAT costs, which helps maintain a fair financial system.

Domestic Reverse Charge

The Domestic Reverse Charge (DRC) is a special rule applied within the UK's VAT system, primarily affecting businesses in the construction industry. It's a bit like a baton-pass in a relay race, but instead of passing a baton, businesses are passing the responsibility of handling VAT to their customers.

Here's how it works in simple terms:

Imagine you run a construction business that provides services to another business, rather than directly to individual consumers. Traditionally, when you charge for your services, you would add VAT to the bill, collect this VAT from your customer, and then pass it on to the government.

However, with the Domestic Reverse Charge, instead of you charging and handling the VAT, you skip adding VAT to your invoice. Instead, you inform your customer that the Domestic Reverse Charge applies. Your customer, if they are VAT registered and the services are for their business, then accounts for the VAT themselves. They report both the VAT they would have paid on your services as well as the VAT they would have claimed back on their VAT return. Essentially, the customer takes care of the VAT that would normally be 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 reverse charge mechanism when invoicing main contractors. This allows you to reclaim VAT on your expenses, leading to potential refunds with each VAT return.

For those involved in installing energy-saving measures, as specified under VAT notice 708/6, there's an additional perk. 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 key. 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, it's wise to 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. This strategic approach to VAT can significantly ease financial management and contribute to your business's success.

For tailored advice, please contact info@togetherwecount.co.uk 

Subscribe to our mailing list and never miss an update SUBSCRIBE