Guide to VAT for Tradespeople
If you work for yourself as a tradesperson, understanding VAT (Value Added Tax) can feel like one of the more confusing parts of running your business. Should you register? What happens when you do? And will it make your services more expensive?
This guide explains everything from the basics of VAT to how it affects small trade businesses — with clear examples, registration thresholds, and practical pros and cons to help you make the right choice.
What Is VAT?
VAT (Value Added Tax) is a government sales tax added to most goods and services in the UK. It’s currently set at 20% for standard-rated items, but there are reduced and zero-rate categories depending on what’s being sold.
For tradespeople, VAT usually applies to labour and materials once your taxable turnover passes the annual VAT threshold — currently £85,000 (frozen until at least 2026).
Once registered, you’ll:
- Add VAT to your invoices for taxable sales.
- Submit quarterly VAT returns to HMRC.
- Pay HMRC the VAT you’ve collected (minus any VAT you reclaim on business purchases).
If you’re not registered, you can’t add VAT to your prices or r eclaim VAT on purchases.
To learn how safe working and compliance processes apply to everyday business admin, see Manual Handling – Lesson 13.
How Does VAT Work?
Let’s say you charge £1,000 for a job.
If you’re VAT-registered, you must add 20% VAT, so your customer pays £1,200. You then pass £200 to HMRC but can reclaim VAT you’ve paid on business costs (such as tools or materials).
If you’re not VAT-registered, you’d still charge £1,000, but you’d pay full price for your materials with no VAT recovery.
The Three Main VAT Rates
VAT Type | Rate | Applies to |
Standard Rate | 20% | Most goods and services (e.g. electrical labour, materials) |
Reduced Rate | 5% | Items such as home energy, children’s car seats, and some insulation work |
Zero Rate | 0% | Books, newspapers, children’s clothing, and certain food items |
Some things are exempt, such as insurance or lottery sales — these don’t count towards your taxable turnover.
For more on managing business risks and compliance obligations, the Risk Assessment – Lesson 1 module provides helpful parallels with financial planning and accountability.
VAT Thresholds and Registration
You must register for VAT if:
- Your taxable turnover exceeds
£85,000 in any 12-month period (not just your financial year).
- You expect your turnover will soon exceed that amount.
You can also register voluntarily if you’re
under the threshold — for example, to reclaim VAT on e quipment or vehicles.
Once registered, you must:
- Display your VAT number on invoices and receipts.
- Charge VAT at the correct rate.
- Submit VAT returns every three months via Making Tax Digital.
Example
If your business hits £85,500 turnover in July 2025, you must register by the end of August and start charging VAT from your registration date.
Making VAT Returns
Every VAT-registered business must complete a quarterly VAT return, reporting:
- Total sales and purchases.
- VAT collected and VAT reclaimed.
- Net VAT owed or refunded.
Returns are submitted digitally through compatible accounting software. Keep all invoices, receipts, and records for at least six years in case of HMRC audits.
If you miss a submission or payment, you’ll enter a surcharge period — a 12-month window where late payments could trigger penalties.
The Manual Handling – Lesson 3 unit demonstrates the same principle as bookkeeping: accuracy, routine, and care reduce costly mistakes later.
Pros and Cons of Being VAT-Registered
Becoming VAT-registered changes how you price your work and how customers perceive your business.
Advantages
- Reclaim VAT on qualifying purchases (e.g. vans, tools, materials, fuel).
- Improved credibility — clients may view VAT-registered traders as more established.
- Eligibility for larger contracts — some commercial or government clients require VAT registration.
Disadvantages
- Higher customer costs — you must add 20% VAT to invoices, which can make you less competitive against non-registered tradespeople.
- More admin — quarterly returns, records, and deadlines.
- Cash flow strain — you collect VAT before paying HMRC, which requires careful management.
If your work is mainly domestic and local, charging VAT could price you above smaller competitors. But if your clients are VAT registered businesses themselves, they can reclaim the VAT you charge — so it has little effect.
Should You Register Voluntarily?
Some sole traders register voluntarily before reaching the threshold because it:
- Enhances their professional image.
- Allows them to reclaim VAT on major purchases (like vans or test equipment).
- Simplifies transition if turnover later grows beyond £85,000.
Others avoid registering to remain competitive on smaller residential jobs. There’s no one-size-fits-all rule — it depends on your customer base and turnover.
For a balanced view on evaluating risk and compliance before making financial commitments, see Risk Assessment – Lesson 2.
Quick Tips for Managing VAT
- Track turnover monthly so you’re never caught out by the threshold.
- Use digital accounting software (e.g. QuickBooks, Xero, or FreeAgent) that supports Making Tax Digital.
- Set aside VAT funds as payments come in — don’t mix them with your profit.
- Check every invoice includes your VAT number and correct rate.
- Keep receipts organised for at least six years.
VAT registration can feel daunting, but it’s an important step in growing a professional trade business. It adds paperwork but also opens up opportunities, credibility, and long-term savings through reclaiming business expenses.
If you’re unsure whether to register or need to understand how it affects your pricing, your accountant can guide you through the best approach.
For more resources designed for tradespeople and electricians, visit https://elec.training/ to explore Elec Training’s full learning library.
FAQs
What is VAT and how does it apply to tradespeople in the UK?
VAT (Value Added Tax) is a consumption tax levied on most goods and services in the UK, currently at a standard rate of 20%. For tradespeople like electricians, it applies to taxable supplies (e.g., installations, repairs), requiring registration if turnover exceeds £90,000 in a 12-month period. Once registered, you charge VAT on invoices but can reclaim it on business expenses, ensuring compliance with HMRC rules.
When do I need to register my trade business for VAT?
You must register for VAT if your taxable turnover exceeds or is expected to exceed £90,000 in any 12-month period. Registration is mandatory within 30 days of realizing this, and voluntary registration is possible below the threshold for benefits like reclaiming input VAT.
What happens if I exceed the £85,000 VAT threshold mid-year?
The current threshold is £90,000 (increased from £85,000 in April 2024). If you exceed it mid-year, register within 30 days of realizing your turnover will surpass it in the next 30 days or has in the past 12 months. Backdate registration to the exceedance date, charge VAT from then, and submit returns quarterly.
Can I register for VAT voluntarily before reaching the threshold?
Yes, you can register voluntarily for VAT before reaching the £90,000 threshold if it benefits your business, such as reclaiming VAT on purchases or appearing more established to clients. Apply via HMRC online, and once registered, you must charge and report VAT.
How do VAT rates differ for standard, reduced, and zero-rated work?
Standard VAT is 20% on most trade services (e.g., electrical repairs). Reduced rate is 5% for specific work like home energy efficiency improvements or renovations in empty properties. Zero-rated (0%) applies to new builds, certain exports, or children’s items, but tradespeople must still register if over threshold.
What are the main advantages of being VAT-registered as a tradesperson?
Advantages include reclaiming VAT on business expenses (e.g., tools, vans), appearing more professional to clients, potential for higher turnover without artificial caps, and easier access to contracts requiring registration. It also allows voluntary registration for input tax recovery even below threshold.
Are there any downsides to registering for VAT too early?
Downsides include increased administrative burden (quarterly returns), adding 20% to prices which may deter small clients, cash flow issues if reclaiming VAT is delayed, and inability to deregister easily if turnover drops. It’s best if you expect growth or have high VAT-reclaimable expenses.
How often do I need to submit VAT returns, and how is it done?
Submit VAT returns quarterly (every 3 months) via Making Tax Digital (MTD) compliant software or HMRC’s online portal. Use your VAT online account to file digitally, reporting sales, purchases, VAT owed/reclaimed; deadlines are one month and 7 days after quarter end.
Can I reclaim VAT on my tools, van, and materials?
Yes, if VAT-registered, you can reclaim input VAT on business purchases like tools, vans (if used solely for business), and materials, deducting it from output VAT charged to clients. Keep records/receipts for HMRC audits.
How can I manage VAT effectively to avoid cash flow problems or penalties?
Manage VAT by invoicing promptly, using accounting software for tracking, setting aside 20% of income for VAT, offering early payment
discounts, reclaiming input VAT quickly, monitoring cash flow, and filing returns on time to avoid £100-£400 penalties per late submission.
