Why do all contractors want to be paid in cash?

[Jaggerdagger]

Yet another contractor today has asked for cash to pay for a service. They are seemingly a legitimate business with a website and plenty of good reviews on Google. I never have cash on me so frankly it's a pain to have to walk 30 minutes to the nearest cash point, when I could do a bank transfer in seconds. If it's more than a couple of hundred pounds, I have to drive miles to go into branch to take the money out. They never advertise that they are cash only when I book their services, so I get caught out unprepared. I'm self employed myself, and have absolutely no problem with people paying me in cash, but equally have nothing to hide with my accounts, so happily accept bank transfers! It's nice to remain flexible with my clients! Just curious, really.

my dh has a small side business (which is seasonal so he will be working a lot of weekends this winter) and we have the issue of people wanting to pay cash as they want to save on the vat - which is annoying.

We do have a card machine and 70% of the time as for a deposit (around 10% of the job total) for the works before they start, it works for us as we’ve had people not pay.

Not all contractors are the same.

You’re presuming they can afford to have mobile banking on their phone and be able to check their accounts on the spot.

Many sole traders cannot afford the data charges.

Other people’s tax affairs aren’t my business, although I won’t knowingly abet fraud.
I don’t pay in cash though because I don’t want to go to a cash machine and take out money, probably over several days due to limits.
I pay by transfer before they leave the house though as I know not getting paid is a big problem for Tradespeople

I will pay in cash. I'm making a point of using cash more anyway as I don't want to risk it being phased out.
If you're paying cash to a contractor it's being spent, in person, hopefully sometimes with other local businesses.

My DH has an actual small side business and is well below the VAT threshold which is sales of £83,000 per year. So when he takes payment in cash, he is not dodging any taxes at all. I think many sole traders also bring in far less than £83k/yr and the request for cash is most likely to ensure they are paid in full on the spot rather than having to chase up bank transfers (not to mention matching bank transfers to specific jobs if the buyer puts no clues in the reference comments).

I have been told for quite a large building job if I paid in 5 cash installments, I could avoid paying VAT but I declined because I was worried the guarantee would be invalidated if I could not prove I had paid him.

One offered to take £80k for a side return in cash, saying he would cut off the VAT - knowing you could avoid £18k was very tempting, but imoral and how would I get that much cash anyway? Frankly, if they all paid their tax they could probably knock that penny off income tax. I believe there is a law in France that you can't pay more than £1k in cash to keep the potential for fraud down. It will be cash-free before we know it anyway.

Indeed it is. Trouble is that Gordon Brown reorganised the tax offices which led to closure of nearly all of the local tax offices and centralised HMRC into a few huge office blocks so tax inspectors (those who didn't take early retirement - most did!) don't have local knowledge anymore and don't do routine visits to inspect the books of businesses any more.

I'm an accountant. I can spot a mile off the businesses who aren't declaring all their income. The signs are pretty obvious really. If tax inspectors actually did some proper checking, they'd recover huge amounts of unpaid tax. Small businesses, especially tradesmen, know their chances of being investigated and their "books" looked at are virtually zero, so are happy to take the risk.

The tax office re-organisations may have saved a bit of money due to centralisation, but the "hidden" costs of massively increased tax evasion, which is snowballing year on year, far outweighs the savings made. Trouble is, nearly all of the "old fashioned" tax inspectors who had local knowledge are long gone and the new breed of "graduate" tax inspectors don't have local knowledge and from my experience of them, barely understand book-keeping/accounts themselves, so aren't really in a good position to start checking a trader's "books".

I've had blinds fitted and rubbish removed and paid via bank transfer and they stayed until it had gone in. It was personal accounts too but it was instant so much easier

IME cash includes bank transfers IE the money is theirs without any issues.

Cheques are a PITA and can be cancelled/ bounce.
Card payments cost them a percentage and can be taken back through a chargeback.

Even in the UK, a trader can't accept cash of over 10,000 Euros (yes, still in place despite leaving the EU), unless they're registered with HMRC as a "high value trader" which may flag them up for extra bureaucracy/oversight, etc. Whether HMRC actually police/enforce those rules is a different matter!

Bank transfers don't prove they're not fiddling their tax either. The money could be going into a second (undeclared) business bank account, or more likely into their personal bank account, with often no entries in the book-keeping/tax return. Yes, blatantly obvious IF investigated by HMRC, but chances of such an investigation are pretty close to zero.

Very true Kazzyhoward. I saw the way it was going and opted for early retirement.

Of course it's to avoid tax. Everyone knows that.

I do get annoyed with this. I bet my bottom dollar that those trades people who avoid paying their VAT are the first ones to moan about failing public services.

More likely spent on paying their undeclared workers (evading employment tax and NIC), or other "cash" traders, (evading VAT, tax and NIC), etc. The largest component of the official "tax gap" is lots of low scale tax evasion within the black economy.

If you pay a trader in cash and that trader doesn't declare it, then around 40-50% of that cash which should have gone to HMRC, (20% vat, 20% income tax, 9% nic) doesn't get there, so the trader benefits a lot more than you, the customer. HMRC loses out massively. It could be worse than that if the trader keeps his declared income under £50k so he doesn't lose his child benefit or under £100k to avoid the 62% marginal tax rate over £100k. It's certainly not "just" 20% that HMRC loses out on.

@Kazzyhoward I remember going to an in person VAT course run by an ex-VAT inspector at a HMRC office. We all learnt much more than just about VAT.

Now all the courses are online.

Mobile banking apps are free and there are lots of inexpensive phone contracts that have loads of inclusive data. I don't think your argument is very convincing.

If you are employed it is really hard to understand how difficult it is to actually make money and stay afloat as a small sole trader business. Creativity can make a big difference in staying in business.

There is a really awkward VAT threshold for one man band businesses because it is done on turnover and not profit.

If my husband goes over a certain threshold then he has to be VAT registered - which will automatically put the prices up for customers. If he can say just under the threshold it is better for both of them - this means he needs to keep his turn over as low as possible. And in building there are lots of high cost items that have nothing to do with profit and push turnover high easily.

Cash can mean the purchases of some items means it doesn't register as part of the turnover

Secondly, for small business, DH has to pay his tax in advance.

This means regardless of what he is earning - he has to make his wages, put his 20% aside plus and an extra 20% to cover the tax on the money he hasn't earnt yet.

@Cherryana lots of self employed people on this thread who don’t insist on cash…

I agree, nearly all of my tradesmen clients have VERY expensive mobile phone contracts - tradesmen can't function without decent smart phones these days, unless they're a simple business like a window cleaner, but even my elderly (70+ year old) window cleaner sends a bill from his app once he's finished the windows with a link within the invoice for me to click to pay by debit card. I can't imagine there are any sole traders who can't afford £20 or so per month for a decent data contract for their phone - that's less than a fiver a week, and some mobile data packages are even cheaper.

Then they have been lucky and paid on time.

If you do a large job and a customer refuses to pay you are screwed. Once the materials are on their property the materials are theirs not yours.

Saying that I did have a builder in, who while I was collecting materials with him, had a customer phone up to chase to pay the builder. T he customer was elderly and didn't know how to do online banking.

Do they have to make purchases on behalf of the customer that are high cost items?

Being a self employed graphic designer, or photographer is very different. More comparable would be the self employed commercial photographer who has to initially pay out the cost of a new car to photograph it, and will then get his money back later, but that cost would count in his turnover even though its passing through for him.

What I am saying, is it is already weighted unfairly against the sole trader business - who doesn't have family money to bail them out, but are trying to stay afloat.

Tha tax argument is not correct, although I'm sure that's why some do it.

Your self assessment return and you VAT return are based on what you report, not what's on your bank statement. You can report cash just as easily as you can not report bank transactions. HMRC are not watching your bank account. The only time they'd ever see your bank account is if they decided to do an investigation into you.

In short, you don't need to accept cash to evade tax, and you are not ensuring it will be reported if you insist on paying by bank transfer. It's naive to think you are.

@Cherryana

Secondly, for small business, DH has to pay his tax in advance.

Sole trader tax is never paid in advance. The "payments on account" I assume you refer to are still paid a few months after the monies are earned. I.e. the first payment on account for 22/23 tax year is due on 31/1/23, and is 6 months of the estimated 22/23 profits, the first six months ends 30/9/22, so the tax on those profits is still paid 4 months AFTER the period in which it is earned. Likewise the 31/7/23 payment on account relates to the second half, i.e. 1/10/22 to 31/3/23, again 4 months AFTER the period in which the profits are earned. If actual profits are higher than the previous year, the difference, i.e. tax on the higher profits, isn't due until 31/1/24, i.e. 10 months AFTER the period in which the higher profits were made. If profits are falling, the sole trader can elect to reduce the payments on account down to the lower profit level, Unfortunately a lot of sole traders don't understand it properly.