Can a builder claim VAT back on materials and other expenses?

VAT can be a confusing subject to navigate when you are running your own business and have little time to spare. But how does claiming back VAT work for a self-employed builder? This article will look at the process when trying to claim back for the expenses it costs to run your business and cover the following areas:

• What is VAT?
• When builders have to register for VAT
• How VAT works for builders
• Claiming back VAT on materials and expenses
• Reverse charge VAT

What is VAT?

Value Added Tax (VAT) is a charge added to the price of many goods and services for consumers. The UK standard rate of VAT is currently set at 20%. However, there are certain items that do not have VAT added and are referred to as ‘zero rate’ goods, such as food, children’s clothing, books, magazines or charity shop items. Domestic gas and electricity bills, energy-saving devices and children’s safety car seats are charged at the reduced VAT rate of 5%. This is because they are deemed ‘living’ expenses.

When it comes to VAT and your business, companies or self-employed people do not have to register for VAT until they have an annual turnover of over £85,000. If you make it over this threshold, it is a legal requirement that you register.

Only if a builder is making over £85,000 a year are they legally required to register for VAT, but you can do so voluntarily if you choose. Because this is a fairly high threshold for a sole trader, smaller businesses or one-person building services are not as likely to have the extra 20% charge on their products or services.

Once a builder is registered for VAT, they are required to add VAT rates to their customer invoices for their services. But what rate should they apply?

Standard rate goods and services are charged at 20% extra. This will apply to most domestic repair and maintenance work, any work to newly-built structures (that don’t fit the zero-rate criteria) and some work to existing structures, such as extensions.

Reduced rate services are charged with an extra 5% added to the invoice price. This includes any installation of energy-saving materials, residential conversion work, such as converting a house into flats or vice versa, or renovating a house or flat that has been empty for at least two years.

Zero-rate goods and services, as the name suggests, have no added tax on the price. This will apply to work on new builds, services for a disabled person’s home to suit their condition, or work on qualifying buildings (listed here). Remember, you can only charge zero rates if you are the main contractor and not employed by another firm to support with their work.

A builder will then have to do a VAT return online every three months, where they pay the added VAT they’ve charged to customers back to HMRC. This total VAT you’ve been paid by your customers is called Output Tax.

When filing a VAT return, the next step is to total up any VAT paid on purchases or business expenses needed to run your business. For example, any VAT you’ve paid on invoices to suppliers of products or parts. This total is called Input Tax.

So, you will pay to HMRC the VAT you have collected on your invoices, minus the VAT you’ve paid to run the business.

Note that claiming back VAT is not really money being paid back to you, it’s a reduction of what you owe the VAT taxman from your higher prices to customers. You collect the VAT from your customer and then get to reduce what you hand over to HMRC by offsetting what you spent on VAT while doing the work.

The simple answer is yes. Check your supplier invoices, or invoices you’ve paid to other contractors or tradesmen who’ve supported on a project, and total up the VAT you’ve paid to them. You’ll then have this taken off your total VAT bill. Always keep your invoices as proof for HMRC.

You can claim VAT on supplier invoices, as well as VAT on fuel required to travel between jobs, the cost of a business vehicle, and many other business expenses you incur.

As of March 2021, the UK government has extended the Construction Industry Scheme (CIS). The reverse charge applies to VAT registered builders that contract the services of other VAT registered construction businesses. 

In short, it means that you won’t pay VAT on an invoice you receive from a contractor you employ, instead, you pay that VAT straight to HMRC. This applies to certain services and you can find a list of when it is and isn’t appropriate to use the reverse charge here.

Let’s say that you employ a friend who is a VAT registered electrician to help with a project you’re working on. Before the rule change, the electrician could have invoiced you £100 plus VAT. You’d then pay them £120 (as standard VAT is 20%) and they would then pay HMRC that extra £20 when they do their VAT return. You would then claim back £20 from HMRC on your own VAT return.

Now with the reverse charge, your electrician friend will invoice you for £100 plus VAT, but you only pay £100 to him and you pay the extra £20 directly to HMRC. You’re basically handing the VAT straight to the taxman instead of paying it to the contractor first, cutting out the middleman.

Always check what services require the reverse charge and at what rate you and your contractor will be charging.

Tracking VAT rates across all your business accounts can be time-consuming and frustrating. Instead, use Countingup to save on the time and stress of your financial admin.

Countingup is the business current account and accounting software in one app and provides a digital tax filing service. With it, you can automate VAT calculations associated with each of your business transactions and make paying your VAT bill easier. Countingup also makes sharing your business’ finances and VAT records with your accountant as easy as the touch of a button. 

Find out more about Countingup here and sign up for free today.