For tradespeople, such as plumbers, electricians or painter-decorators, calculating costs for your customers is a balancing act, with several considerations to be taken into acccount, including the cost of materials and supplies necessary for the job, overhead expenses for the business and the cost of labour.
It is in the latter area where some confusion may lie, particularly with regards to VAT treatment. This brief guide will outline what you need to know about VAT on labour costs.
Is VAT charged on the cost of labour?
Whether VAT is charged on the labour costs associated with a trade job depends on the type of job being carried out.
It can usually be assumed that VAT at the standard rate of 20% is charged on labour, but the VAT rules in the UK are never straightforward and can be confusing to those who aren’t experienced in dealing with it. So let’s dive into the detail a little more.
VAT treatment of main supply
To begin with, it is important to note that how labour is treated depends upon the VAT treatment of the main supply itself. The majority of services provided by tradespeople are subject to VAT at 20% However, some items are subject to a reduced rate of 5%. Other goods and services are zero-rated, while others are exempt or outside the scope of VAT.
When might VAT not be charged on labour?
Examples of work carried on which VAT is not charged include work on new build housing which is zero rated.
For example, a plumber fitting a bathroom in a new house will not charge VAT on the cost of supplying and fitting the bathroom.
Likewise, work carried out on new houses by electricians, joiners and painter-decorators is zero-rated and VAT is not charged on either the cost of goods or the labour charges.
Another example, of charges, including labour, on which VAT is not chargeable is the installation of solar panels.
Other work carried out may be subject to VAT at the reduced rate of 5%. For example, work carried out on a building being converted into a dwelling.
Occasionally labour costs will be outside the scope of VAT. For example, labour included within the cost of an MOT test. However, VAT is charged on labour costs for car repairs and maintenance.
For the majority of trades, VAT is not itemised; it is consolidated in the net price on the invoice. This means it is based on the total cost of the job, including both parts and labour. This is good news because it streamlines the billing process, and customers are less likely to query the cost of goods or labour.
Do all trades have to charge VAT on labour?
Only VAT-registered businesses (which you are required to be if your annual turnover is greater than £85,000, need to register for and charge VAT. If your business is below this threshold, you don’t need to factor VAT into your costings (although you can still register voluntarily).
However, it is good to prepare for the possibility of future VAT registration as your business grows. You can do this by keeping digital records to help comply with the Making Tax Digital requirements for VAT once VAT registered.
Once your taxable turnover exceeds the £85,000 threshold in a 12 month period, you must notify HMRC and register for VAT. You will then need to charge VAT on all sales on which VAT is applicable – the good news is you can also reclaim VAT on eligible business expenses.
Advice on how to get VAT right
If you work in the trade and are approaching the VAT threshold, or have recently passed it, it’s time to make sure your VAT is taken care of correctly.
We recommend consulting a VAT expert or HMRC if you are unsure about whether or not you need to be charging VAT, and to ensure you are charging the right amount.
My area of expertise is land and property transactions but I have extensive knowledge of both domestic and international VAT and I love complex VAT queries. I have an Honours degree in Business Studies and a VAT legal and technical qualification from the Institute of Indirect Taxation.View my articles