When a builder asks for payment in cash, you naturally assume that he is being less than open with the taxman. But he may have another, more urgent, issue on his mind – the desire to avoid getting involved in VAT, the bane of many a small businessperson’s existence.

“When small businesses complain about burdens on business and regulation, VAT always comes out either at or near the top,” confirms John Davies, Head of Business Law at the Association of Certified and Chartered Accountants. “[But] the Government is now trying to make it easier for small and medium enterprises to deal with VAT.”

The limit for VAT registration is continually being raised. From April 25th 2002, you have to register for VAT if your annual taxable turnover exceeds £55,000 or if the value of taxable supplies is likely to exceed that sum in the next 30 days. Although that may sound like a lot, for a very seasonal business, which makes most of its profit at Christmas, for example, it is easy to breach the limit very quickly. And since VAT registration reflects turnover not profit, a small builder who makes a relatively small profit but deals with expensive materials may have to register.

For those who grumble about being an unpaid tax collector for the Government, there are compensations. Being registered for VAT can actually save you money and some opt for voluntary VAT registration before they reach the limit. And changes to the law this April mean that VAT returns are becoming simpler.

What is VAT?

Value Added Tax, or VAT, is a tax most suppliers of goods and services charge by adding it to those goods and services. Business supplies include selling goods, renting and hiring goods, business stock used for private reasons, services including hairdressing, charging an admission price for buildings, and providing supplies as a self-employed person.

VAT rates vary according to the goods and services supplied. There are four categories;

  • Exempt supplies: Including education, finance, insurance, and the services of doctors and dentists (but not some other services, such as osteopaths). There is no VAT charged on exempt supplies. If you only supply exempt services, you cannot usually register for VAT. However if you are VAT registered and have some exempt supplies, you may have difficulty claiming back all your input tax.

  • Zero rate: Charged on most food (but not restaurant or takeaway meals), children’s shoes and clothing, prescriptions, books and newspapers, new house sales and prescriptions. If the only goods you supply are zero-rated, you may not have to register to VAT – but you do have to apply for exemption from registration.

  • Reduced rate. A rate of 5% that includes fuel and power used in homes and by charities.

  • Standard rate. Now 17.5%, and applied to all goods and services which do not fall into the other three categories.