How do I pay my builder - need wodges of cash!

[bigbadbarry]

Apparently he is approaching the VAT limit so wants the last installment in cash. He has been a brilliant builder so I don't want to upset him (and no idea if this is legal so haven't asked ?!!) but purely from a practical viewpoint how do I lay my hands on £12,000 cash? It is in the bank waiting for him, just not sure how to access it. Thanks

But hang on - if you pay 20% on turnover, then that does seem harsh but DP has just reminded me that you can claim back the VAT that you pay on materials, but even so, you wont be able to claim back VAT on wages and such like. It doesn't seem fair somehow.

Maybe chat to your builder about paying for materials direct, we often get clients to do that because we don't have the cash to pay upfront and if there is a problem we could end up having paid for materials and not get paid ourselves. It does happen.

"Oldbeanbags - that was an interesting link - i didn't realise you had to pay 20% of your turnover rather than profit for VAT. That is harsh. "

But it's not true.

You pay 9.5%, if you use the flat rate scheme.

If you prefer to account for inputs and outputs, then you can do that (n this case, your bill includes 20% VAT (which isn't 20% of the invoice amount, it's 1/1.2 = 16.67% of the invoice total), but then you can reclaim VAT on supplies, it can be cheaper, depending on how much of your billing goes to materials and how much is labour.

if you have online banking you can transfer into his account, this will avoid these cheque charges that apparently exist. All you need is his sort code and account number. Barclays limit is 10k a day, Lloyds is 25k, others vary.

I hate the way VAT is charged on this, sticks 20% on works to keep houses warm, dry and efficient as well as hammering tradesmen. But none of us are above the law so that's how it is.

Thank you, that sounds sensible. I'll have a word tomorrow.

Oh, cross posts. I meant about paying suppliers.

aga Flat rate schemes rarely work out to the benefit of the taxpayer - that is why HMRC like them

the biggest bugbear about VAT is that house builders putting up crappy little new houses do not have to pay VAT
but somebody doing a high quality extension to an existing property does

Well they worked ok for me, but anyway the point is that that's the MOST that a VAT-registered builder would need to pay. 9.5% of the invoice total to the taxman.

To be honest that isn't really the point and it isn't for me to say well actually mate you only have to pay 9.5% so I think you should do that. I feel like he has been really good and unobtrusive and fast and that I should go along with his request as far as I can.

The builder doesn't pay VAT at all. If he's registered for VAT he has to charge VAT to his customers (which makes him seem more expensive but that's designed to help genuinely small tradesmen)

Once he's registered for VAT he can claim back any VAT he pays on materials, so apart from having to do more paperwork he's better off. However, if he's not going to declare the income for VAT purposes, he's not going to declare it for income tax purposes either is he?

I'm not sure about paying suppliers TBH. If you do that you won't have a receipt from the builder or any comeback to him if anything goes wrong with the materials he supplied but you paid direct. But then if you're going to be part of a dodgy deal there are always going to be pitfalls, which depending on your luck you may or may not get away with.

talkinpeace, suggest username change for you: talksloadsofsense

I can understand why he wants to remain under the VAT threshold because he is likely to price himself out of the market if other similar companies aren't VAT registered and he is. However I wouldn't pay cash for all the reasons above (particularly you having no come back). I think you have options - pay a supplier directly (only for something direct for your project) pay what you can by BACS transfer, and then pay the rest in the new financial year. (Which isn't too far away). In my (limited) experience it is generally labour only singlehanded folk that aren't VAT registered (eg floor fitters, tree surgeons) as the difference between profit and turnover is much smaller as they don't have materials going through the books.

If he breaches the threshold he will pay 20% of turnover, but he will charge customers the VAT- it doesn't become an expense for him, he will become the 'collection agent' if you like, for HMRC to claim the tax from the end user of the item. It just becomes a liability that he owes HMRC from his own customers.
Someone who is VAT registered will more than likely charge 20% more than the non VAT registered supplier (to cover what must be paid to HMRC) but this is to help protect the small trader.

insertusername
VAT registration limit runs on a rolling 12 months so sadly the year end trick does not work - HMRC closed that door a few years back

Aga I'm not quite sure where you get your 9.5% figure from.
If a builder is not in the flat rate scheme - most are not - then its 20% of turnover less 20% of taxable expenditure

therefore as with all B2C businesses there are distinct advantages to not being registered.

I've just been on the phone to a client telling them to take a week off for hat very reason.

He has only just realised now, when the last installments are due, that this £12k will push him over the limit? Pull the other one.

extras ... the extras on our work were around £10k

Yes, senua. If £12k is "just" an instalment, how much was the job worth and how many similar jobs would you expect him to do in a year? Sounds like he should have registered ages ago.

And isn't the figure variable on a flat rate scheme depending on circumstance anyway? I've seen 14% I'm sure.

depends on the industry .... and HMRC have the final say www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#4

If the builder is about to approach his VAT Threshold now, what is he planning to do for the next 3months? Cash only work?! Hmm.

knitterati
as I said above, its a rolling 12 months rule
and
not all businesses have their year end in March

Offer him £10k, if he gets to avoid tax then so should you!

Tell the bank you're paying him if they ask, not your job to lie

It's not 20% of turnover, it's 16.67% of turnover.

20% on prices = 16.67% of turnover.

9.5% for builders is simple - if you can reclaim more in VAT on your inputs so your effective rate is less than 9.5% of turnover, then go that route, and if you can't, then use the flat rate scheme.

There is no need to ever pay more than 9.5% of turnover.

Anyway whether the builder pays on the flat rate scheme or not (the rate of which varies for different industries) he currently isn't registered.

I'm concerned that he's told you this and you are therefore knowingly helping him to avoid vat and income tax and NI.

He will have known about this when he took on the job. £80k is a figure that will be well known to him. He never intended to pay tax of any kind on the money.

It's clearly better for him to be vat free since he is in a business to consumer industry but he's being greedy.

talkinpeace thanks for the info. I was just thinking if the builder is usually below the limit but suddenly coming very close then a very short delay might sort it out. The rolling year also suggests that the explinatio. being off for 3months and therfore under the VAT threshold doesn't make sense?

OP - what does your quote say about payment and VAT? I wouldn't endorse fiddling the VAT man aka us but it does seem unfair on you if you signed up to one set of legitimate terms and this is potentially changing at the end?