Do construction businesses have to be VAT registered?
Businesses do not have to be VAT registered to work in the construction industry unless their annual turnover is over £85,000. This applies to both sole traders and limited companies.
If your turnover is under the VAT threshold, you can choose to register for VAT (voluntary registration). Some subcontractors do this as it allows them to reclaim VAT on goods they buy for their business.
VAT registered businesses are issued with a VAT registration number and must charge output
VAT on sales of goods or services. Their VAT invoices should show the VAT rate for each item. VAT invoices must also show when the domestic reverse charge has been applied.
VAT registered companies will also need to submit a VAT return to HMRC detailing input VAT and output VAT. Any VAT owed to HMRC must be paid on time to avoid penalties.
You can submit your own tax returns, but most VAT registered companies engage the services of an accountant to ensure they do not overpay or underpay.
Are the VAT rules different for construction companies?
The VAT rules for construction companies aren’t necessarily different to other sectors, but they can be more confusing.
Working out how much VAT to charge can be a challenge in itself, and there’s also the reverse charge element to consider.
In some cases, you apply normal VAT rules to a sale and create a normal VAT invoice for the customer. In others, you may need to apply the domestic reverse charge.
What is the VAT rate for building and construction services?
VAT rates for construction services may be charged at standard rate (currently 20%) or reduced rate (currently 5%). Certain construction services are charged at zero rate (0%). The VAT reverse charge is only applicable to standard and reduced rate services.
Calculating how much VAT to charge can be confusing. You can find government guidance here, but to save yourself the headache, you might find it more beneficial to work with Empowered by Cloud.
We specialise in construction accounting and will ensure you use the correct VAT rate, show the correct information on your VAT invoice, and account for all input tax and output tax on your VAT return.