This article will look at VAT and how it applies to electrician businesses and their customers, by answering the following questions:
- What is VAT?
- Should electricians be VAT registered?
- Do electricians charge VAT?
- How do electricians process a VAT return?
What is VAT?
VAT is short for Value Added Tax. This is a charge added to the price of many goods and services for consumers. The standard rate tax is set at 20%, but UK consumers do not pay VAT on food, children’s clothing, books, magazines or charity shop items. Domestic gas and electricity bills, energy-saving devices and children’s safety car seats also have a reduced VAT rate of 5%. This is because they are deemed ‘living’ expenses.
Businesses do not have to register for VAT until they have an annual turnover of £85,000 or more. Therefore, smaller businesses, or one-person operations are not as likely to have the extra 20% charge on their products or services.
Should electricians be VAT registered?
Only if an electrician is making over £85,000 a year are they legally required to register for VAT. This threshold of £85,000 changes slightly every year and usually goes up on the 1st of April. If you are an electrician, unless your turnover is more than £85,000, you do not have to be registered.
What happens once they are registered?
Once registered, electricians should add an extra 20% to their customer invoices to accommodate the VAT.
VAT registered electricians will then have to total up all the VAT paid on their customer sales, which is known as ‘output tax’. Then you’ll have to total up any VAT you’ve paid on your own purchases or business expenses needed to run your business, such as your supplier costs. This total is called ‘input tax’.
Businesses have to do a VAT return every three months (quarterly). To calculate how much VAT you will pay back to HMRC, subtract your input tax paid from your total output tax charged to customers, using this simple formula:
Output tax – input tax = VAT payable
There are other VAT methods available to businesses, such as the Flat Rate scheme. This scheme allows a business to pay a set rate (between 10-15%, this changes yearly) on their gross turnover, instead of a variable rate based on VAT.
Sole trader electricians may choose this method to simplify record keeping as you do not have to keep detailed invoices or receipts for proof. It can also benefit your cash flow since you’ll know how much you are expected to pay, instead of having a large chunk coming out at once.
Do electricians charge VAT?
As mentioned, if the electrician’s turnover exceeds £85,000 then they will charge VAT on their customer invoices. But what rate should an electrician charge? That very much depends on the work, and as an electrician you may undertake a variety of these types of work, so it’s important to understand the difference.
Standard rate, reduced rate or zero rate?
Standard rated goods and services have the standard VAT rate added to the value, which is an extra 20%. Zero rated goods and services, as the name suggests, have no added tax on the price. Some of your electrical services may qualify for having the reduced rate of 5% added to the selling price. Let’s look at what is covered by each.
Standard rates services can include:
- Most domestic repair and maintenance work
- Work to newly built structures that don’t fit the zero rate criteria
In some cases, the reduced rate VAT of 5% will apply, such as for:
- The installation of energy saving materials, such as solar panels, wind or water turbines
- Residential conversion work, such as converting a house into flats or vice versa
- Renovating a house or flat that has been empty for at least two years
There will be no added VAT to invoices for zero rated services such as:
- Work on new build houses, including the supply of certain appliances (for example, water or space heaters)
- Services for a disabled person’s home to suit their condition
- Work on specially qualifying buildings (for charitable purposes or non-business use, such as a Scout Base or a Village Hall) but only if you are the main contractor and not employed by another firm to support on the work
You can check the details of any projects with the list on HMRC’s website to be sure you have invoiced the correct rate.
How do electricians process a VAT return?
When you register for VAT you will receive a certificate with your VAT number and information on where to process the return. A business would usually do a VAT return every three months (quarterly). This three month period is referred to as your ‘accounting period’ by HMRC.
Most businesses will fill in their VAT return online, and fill in the relevant figures such as total turnover, your input tax and output tax. You will then receive a total VAT bill which you can then pay via online banking, telephone, BACS or Direct Debit. You may already know what your total VAT bill will be, if you have used the formula we looked at earlier.
You can also ask your accountant to file your VAT return for you, once you have given them the authorisation to do so via your HMRC online account.
Remember as well that if filing for VAT, you’ll need to register for Making Tax Digital before April 2022.
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