An issue we often encounter in the renovation industry is people or tradesmen who negotiate cash-in-hand payments.
The temptation to do this is strong – wouldn’t we all want to save a bit of money on our tax payments? VAT registered builders are required to charge 20% on top of their invoice… ouch.
However, not all builders are required to be VAT registered – currently the threshold stands at £77,000 turnover per annum – below which VAT registration is optional. Most one-man companies fall below this threshold, but once you add one or two employees to the equation, the company is forced to register for VAT and rates can quickly get uncompetitive for small building work. The problem with this, with regards to the building trade, is that the one-man subcontractors don’t always offer the same quality of service as bigger, more established companies, and shady VAT-avoidance deals increase.
Back to cash payments – there’s nothing illegal about it, as long as it’s not done with the specific intention of tax avoidance. No one says ‘I’ll knock off 15% if you pay me cash because then I don’t have to put the job through the books’ – it’s more subtle than that. Often, builders will make excuses like ‘it’s more convenient’ or ‘some of the guys don’t have bank accounts’. The current system is an invitation for scammers to profit, whilst the honest workers suffer in the competition.
Perhaps there is something to learn from the system used on the Isle of Man (for more than a decade), where a flat rate of 5% VAT is charged on all building work. In fact, they have seen their construction VAT receipts increase!
To date, the UK Treasury has not considered a change. According to research, VAT avoidance in the building industry is costing an estimated £2 billion annually. A change needs to happen soon.
One way to put an end to this fraudulent behaviour, if the government won’t act, is for people to make smarter decisions about the builders they hire. In the short run, paying cash to a one-man building company may be saving you a bit of money (but let’s be honest – if you partake in this, you are knowingly breaking the law). However, in the long run, it is damaging to the building industry – both to the hardworking, honest builder, and to the professionalism of the trade itself… and worst of all, it is detrimental to the QUALITY of work being produced. Next time you renovate, be sure to think about who you are choosing to employ – if they’re dodgy about payments, what’s to say they’re not doing a dodgy job of your renovation?

(source: Homebuilding & Renovation, October 2012)