VAT is one of the most confusing aspects of running a trade business in the UK — especially for sole traders who are just starting out. This guide explains everything you need to know about VAT as a tradesperson, in plain English.
What is VAT?
VAT (Value Added Tax) is a consumption tax charged on most goods and services in the UK. The standard rate is 20%. As a VAT-registered business, you collect VAT from your customers on behalf of HMRC and pay it over to them, minus any VAT you've paid on your own business purchases.
When do you need to register for VAT?
You must register for VAT when your taxable turnover exceeds the VAT threshold in any rolling 12-month period. For 2024/25, this threshold is £90,000. You can check the current threshold on the GOV.UK VAT registration page.
You must also register if you expect your turnover to exceed the threshold in the next 30 days. Failing to register on time can result in penalties from HMRC.
Can you voluntarily register for VAT?
Yes. Even if your turnover is below the threshold, you can choose to register voluntarily. This can be beneficial if most of your customers are VAT-registered businesses — they can reclaim the VAT you charge, so it doesn't cost them anything extra, and you get to reclaim VAT on your own purchases.
However, if most of your customers are private individuals (homeowners), adding 20% VAT to your prices makes you less competitive. In this case, staying below the threshold is usually preferable.
How does VAT work on quotes and invoices?
If you're VAT-registered, your quotes and invoices must show:
- Your VAT registration number
- The net amount (before VAT)
- The VAT amount (20% of the net)
- The gross total (net + VAT)
GoFix handles all of this automatically. When you toggle VAT on in the quote builder, it calculates the 20% VAT amount and displays it clearly on the PDF quote. Your VAT number appears in the footer of Pro quotes.
What is the Flat Rate Scheme?
The VAT Flat Rate Scheme is a simplified way of accounting for VAT, designed for small businesses with turnover under £150,000. Instead of calculating VAT on every transaction, you pay a fixed percentage of your gross turnover to HMRC.
For general building or construction services, the flat rate is typically 9.5%. This can be simpler to administer than standard VAT accounting, but whether it saves you money depends on your specific business costs. Speak to an accountant before deciding.
Making Tax Digital for VAT
Since April 2022, all VAT-registered businesses must use Making Tax Digital (MTD) compatible software to keep digital VAT records and submit VAT returns. This means you can no longer submit VAT returns manually through the HMRC portal — you must use approved software.
VAT on materials vs labour
In most cases, both labour and materials are subject to the standard 20% VAT rate. However, there are some exceptions — for example, certain energy-saving materials installed in residential properties are zero-rated. The rules are complex, so if you're unsure about the VAT treatment of a specific job, check the HMRC VAT guide or consult an accountant.
Understanding VAT is essential for running a compliant, profitable trade business. If you're approaching the VAT threshold, now is the time to get your quoting and invoicing systems in order. GoFix makes VAT-compliant quoting simple — try it free today.
