When should a tradesperson register for VAT?

VAT is one of those things most tradespeople ignore until it lands on their doorstep, and by then it is often a scramble. Getting ahead of it saves money and stops nasty surprises. Here is what registering for VAT actually means for a UK trade business, and how to know when it is time.

When you have to register

You must register for VAT once your taxable turnover goes over £90,000 in any rolling 12 month period. Rolling is the word that catches people out. It is not your accounting year or the tax year, it is any run of 12 consecutive months. So every month you should be adding up the last twelve and checking where you stand.

You also have to register if you expect to go over £90,000 in the next 30 days on its own, for example if you have just landed one large contract. Once you are registered, you stay registered until your turnover drops below the deregistration threshold of £88,000, at which point you can apply to come off.

What counts towards the threshold

Taxable turnover is the total of the work you do that VAT would apply to, before costs. It is not your profit. A sole trader plumber turning over £92,000 but only keeping £40,000 after materials and van costs still has to register, because it is the £92,000 that matters.

What changes once you register

From your registration date you add VAT, usually 20%, to most of your invoices, and you hand that VAT over to HMRC on a quarterly return. In return you can reclaim the VAT on things you buy for the business, from materials to tools to your van servicing. You also have to keep digital records and file through Making Tax Digital compatible software, which is now the standard way VAT returns are done.

Some construction work is not standard rated. New builds are often zero rated, and certain renovations qualify for a reduced 5% rate. It is worth knowing which of your jobs fall where, because charging the wrong rate is a common and expensive mistake.

The bit that stings for domestic trades

If most of your customers are households, VAT is a genuine problem, not just admin. A homeowner cannot reclaim the VAT you charge, so adding 20% makes you 20% dearer overnight against an unregistered rival quoting the same job. If your customers are mainly other businesses who can reclaim it, VAT is far less of an issue, because the 20% washes through.

This is why some trades work hard to keep turnover just under the threshold, and why others decide to register voluntarily to reclaim VAT on big material purchases. There is no single right answer, it depends on who pays your invoices.

Should you use the Flat Rate Scheme?

The Flat Rate Scheme lets smaller businesses (VAT taxable turnover up to £150,000) pay a fixed percentage of gross turnover instead of working out every bit of VAT in and out. It can simplify things, but there is a catch for labour heavy trades. If you spend very little on goods, you are classed as a limited cost trader and pay a flat 16.5%, which usually wipes out any benefit. Plenty of subcontractors who signed up expecting a saving found there was none. Do the sums for your own numbers before you commit.

A simple way to stay ahead

The tradespeople who handle VAT calmly are the ones who see it coming. Keep a rolling total of your turnover, know roughly how many months of headroom you have, and decide in advance what you will do when you get close. If you are heading for the threshold, that is the moment to speak to an accountant about registration, the Flat Rate Scheme and pricing, rather than after HMRC writes to you.

Keeping tidy digital records of every quote and invoice is what makes this easy, and it is exactly what TradePilot is built to do for UK trades. If that sounds useful, join the waiting list and we will let you know the moment we launch.