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The VAT threshold for registration in the UK has officially increased to £90,000 from 1 April 2024. If you are running a small construction business or subcontracting in the industry, VAT on Construction change is crucial. Deciding whether to register, deregister or even split your workstreams can be tricky.
In this guide, IBISS & CO expert Sunil Yaqoob walk you through the options. Help you make the right decision for your business and show you how VAT schemes can be tailored to your specific needs.
Why VAT Registration for Construction Firms is Crucial
From April 2024, the registration threshold for VAT has increased to £90,000. If your business taxable turnover is at or above this amount. You must register for VAT. If your turnover falls below £88,000, you can deregister. While this might seem straightforward, things can get complicated when you are in construction, where turnover fluctuates, the work is often mixed (labour vs. materials) and clients vary from VAT registered businesses to everyday homeowners.
Should your construction firm register for VAT, deregister or split workstreams? The decision is not always black & white. Here is a breakdown of what you need to consider.
Should Your Construction Firm Register for VAT?
If your taxable turnover exceeds the £90,000 threshold, VAT registration is mandatory. However even if you are below this threshold, there might still be benefits to registering voluntarily especially for construction businesses.
Why You Might Want to Register
Reclaim Input VAT on Materials
Many of your costs are tied up in materials that carry VAT. If you register you can reclaim VAT on these materials which could significantly reduce your costs.
Client Expectation
If you mainly work for VAT registered clients like developers or other businesses), they’ll expect VAT invoices. Registration helps your business stay competitive and make sure you are charging VAT when appropriate.
Large Projects
If you are expecting large contracts or anticipate growth. It could be worth registering now to avoid crossing the threshold later.
Why You Might Choose Not to Register
Administrative Burden
VAT registration brings many responsibilities. You must file VAT returns regularly, maintain accurate records & make sure full compliance. For small contractors this can feel like a heavy administrative load.
Price Impact
If most of your customers are small businesses or private homeowners that are not VAT registered. They will endure the price of VAT. This should have an effect on your competitiveness. If your quotes end up 20 percent higher due to VAT.
If you are below the threshold but close to it. It is important to monitor your turnover. A small jump in turnover could push you over the limit, making registration necessary.
Should You Deregister for VAT?
If your taxable turnover falls below £88,000. You can consider deregistering for VAT. But before making that decision. Look at both sides of deregistration.
Reasons to Consider Deregistration
Simplify Admin
Deregistering means you no longer need to deal with VAT returns, invoices with VAT or compliance checks. If your business is small and turnover is dropping. This could reduce the administrative load.
Competitive Advantage
If you mainly serve private individuals or small businesses who are not VAT registered, you would not have to add VAT to your prices. This can make your quotes more attractive compared to competitors who add VAT on top.
Cash Flow
When you are VAT registered. You must pay HMRC the VAT on sales, even before you have been paid by clients. Deregistering make cash flow easy, especially if you work with clients who are slow to pay.
Things to Watch Before Deregistering
VAT Reclaims
If you have reclaimed VAT on equipment or materials in the past, you will have to pay back any VAT you have claimed since deregistering. This could be a large sum if you have bought expensive items recently.
Future Growth
If you expect your turnover to rise again, deregistering could be a short term solution. However, if you go back over the £90,000 threshold. You will need to reregister, potentially confuse your clients.
If you want deregistration, think about your growth projections and whether it is worth the paperwork to stay registered for VAT.
Should You Split Workstreams in Your Construction Business?
In construction, you often handle different types of work. Some of which might be labour only like repairs and others that involve both supply and installing materials. Splitting your workstreams helps you navigate VAT registration without triggering unnecessary obligations.
What Does Splitting Workstreams Mean?
Splitting work streams means dividing your business into different arms or services like a labour only division separate from one that includes materials supply & installation. This way one stream might stay below the VAT registration threshold while the other stays registered.
What Does Splitting Workstreams Mean?
Different Client Types
If one part of your business works mainly for VAT registered businesses and the other works for private homeowners. It could make sense to split the business. However, you must be clear about the distinction between the services and be careful not to artificially divide your business solely for tax advantages.
Risks
HMRC might view splitting as an attempt to avoid VAT registration if it does not reflect your actual operations. Make sure that the separation of workstreams is genuine well documented and transparent.
Construction
Accountants
Select the Right VAT Scheme for Your Construction Firm
When you are registered VAT business. You need to select between different VAT schemes. The two most common ones for construction firms are the Flat Rate Scheme and the Cash Accounting Scheme.
Flat Rate Scheme (FRS)
The Flat Rate Scheme simplifies VAT accounting by applying a flat percentage rate to your turnover. For construction businesses the flat rate is typically 12%.
Pro
- It is easy to calculate VAT and you don’t need to track every input VAT item.
- If your business does not have many VAT-exempt purchases, you may pay less VAT overall, as the flat rate can be advantageous for low input businesses.
Cons
- If you buy a lot of materials that have VAT, you won’t be able to reclaim that VAT under FRS. This can be a downside if materials make up a large portion of your expenses.
Cash Accounting (CAS)
The Cash Accounting Scheme allows you to pay VAT only when your clients pay you. Similarly, you reclaim VAT on purchases when you have paid your suppliers.
Pro
- It is a great option for businesses that are paid slowly but need to pay suppliers quickly.
- You don’t need to pay VAT until you have actually received payment, which helps with cash flow.
Cons
- You must have a turnover of less than £1.35m to qualify.
- You can not reclaim VAT on materials until you’ve actually paid for them, which could hurt your cash flow if you pay suppliers quickly.
What Types of Construction Are VAT Exempt?
Some construction services do not attract standard VAT rates. Understanding these helps you price jobs correctly. VAT Exempt or Zero-Rated Activities Include.
Always check detailed HMRC guidance, as exemptions depend on the nature of the project.
- New build residential properties.
- Approved conversions, such as commercial to residential.
- Work for disabled adaptations.
- Energy saving materials in certain circumstances.
- Charitable building projects designed for non business use.
Practical Tips for VAT Compliance
Stay compliant while avoiding costly mistakes with these simple practices.
- Regular monitoring helps you avoid forced registration.
- Organise invoices, receipts and work categories to simplify audits.
- VAT registered clients allow you to price competitively.
- Misunderstanding VAT rates can lead to penalties.
- Professional Construction Accountant advice helps you structure workstreams correctly.
What is the Best Option for Your Construction Firm?
Whether you register for VAT, deregister or split your workstreams depends on your specific business circumstances. Here are a few important takeaways.
VAT registration mandatory if you exceed the £90k threshold.
If your turnover is close to £88,000, deregistering might be worth considering. But think carefully about the long term implications.
Splitting workstreams can help optimise your VAT position. But needs to be done carefully to avoid HMRC scrutiny.
Choose the right VAT scheme can simplify your admin & improve cash flow.
Ready to Take Control of Your VAT Decisions?
With the new VAT threshold now in effect. It is more important than ever to stay informed and ahead of the curve. If you are nearing the threshold or if you’re uncertain about your VAT strategy. It is time to make a plan. IBISS & CO can help you assess your VAT options make sure your records are compliant and advise on the best course of action for your business.
Contact Us Today. Get expert guidance on VAT registration, deregistration or splitting workstreams.
Want more insights on VAT on construction businesses? Visit IBISS & CO nearest office in London or book a online meeting to understand VAT schemes and make informed decisions for your business.
