#VAT for Trade Businesses: Registration, the Flat Rate Scheme and Markup

VAT is where a lot of trade businesses get their pricing quietly wrong — marking up the gross instead of the net, treating collected VAT as income, or crossing the registration threshold without realising what it does to their prices. This guide covers the essentials in plain English: when you have to register, how to calculate VAT on your invoices and your markup correctly, the Flat Rate Scheme, the reverse charge for construction, and what crossing the threshold means for your quotes.

First, the disclaimer that actually matters: this is general information, not tax advice. VAT rules and thresholds change, and the right answers depend on your specific business. Confirm anything you act on with your accountant or HMRC.

#When you must register for VAT

You must register when your taxable turnover in any rolling 12-month period goes over the registration threshold — £90,000 at the time of writing, but check the current figure on GOV.UK, as it changes.

Two things trip tradespeople up:

• It's rolling, not April-to-April. You check the last 12 months at the end of every month, not once a year at your accounting date. A busy winter can push you over mid-year.
• It's turnover, not profit. If you supply and fit materials, the materials you invoice count towards the threshold even though most of that money goes straight back out to the merchant. A kitchen fitter billing £8,000 jobs where £5,000 is materials hits £90,000 of turnover far sooner than their profit suggests.

You must also register if you expect to go over the threshold in the next 30 days alone. And you can register voluntarily below the threshold — worth considering if most of your customers are VAT-registered businesses (they reclaim your VAT, and you reclaim VAT on your van, tools and materials).

#How VAT works on your invoices

Once registered, you charge VAT — normally 20% — on your full selling price: labour and materials together. There's no splitting the invoice so labour dodges VAT; if the supply is standard-rated, all of it is.

In return, you reclaim the input VAT you pay on business purchases: materials, fuel, tools, van costs, software. Each quarter you pay HMRC the difference between VAT charged and VAT reclaimed.

The mental shift that matters: VAT you charge is never your money. You collect it for HMRC. Price jobs, measure profit and pay yourself from the net figures. Keeping collected VAT in your working account and spending it is one of the classic ways trade businesses get into trouble.

#VAT on markup — the worked example everyone should know

Here's where pricing goes wrong most often. Say you buy materials at £100 + VAT (£120 on the merchant's invoice) and you want a 30% markup.

The right way — markup on the net, VAT on top:

Your profit on the materials is £30 — the difference between your net cost and your net sell price. The £26 VAT belongs to HMRC (less the £20 you reclaimed on the purchase, you hand over £6 on this line).

The common mistake — marking up the gross:

Take the £120 gross merchant price, add 30% to get £156, then add VAT on top: £187.20. You've now charged VAT on VAT, your price looks inflated against competitors doing it properly, and your accounts won't reconcile cleanly. The reverse mistake — marking up the gross and not adding VAT because "it's already in there" — silently shrinks your markup to about 8% instead of 30%.

The rule: work in net figures until the final line, then add VAT once. Our free markup and VAT calculator does exactly this — enter net cost, markup percentage and VAT rate, and it returns your profit, sell price ex VAT and the invoice total. It also shows the difference between markup and margin: a 30% markup on cost is only a 23% margin on the sale, which matters when your accountant talks in margins.

#Standard VAT vs the Flat Rate Scheme

On standard VAT accounting, you charge 20%, reclaim input VAT on purchases, and pay the difference. More bookkeeping, but you get full credit for every VAT-bearing cost — which suits trades that buy a lot of materials.

On the Flat Rate Scheme, you still charge customers 20%, but you pay HMRC a fixed percentage of your gross turnover and (with limited exceptions) don't reclaim input VAT. The percentage varies by trade — general building services and labour-only construction have different rates.

The trap to know about: limited-cost traders. If your spending on goods is below a small threshold (broadly, less than 2% of turnover or less than £1,000 a year), you must use the 16.5% rate regardless of your trade. On labour-only work, 16.5% of gross turnover is almost the whole 20% you charged — with no input VAT reclaim, the scheme's benefit largely disappears. Labour-only subcontractors are exactly the businesses most likely to fall into this, so do the sums with your accountant before joining.

Also worth knowing: cash accounting. Below a turnover limit, you can account for VAT when invoices are actually paid rather than when they're issued — a genuine cash-flow help in a trade where customers pay slowly, because you're not funding HMRC's VAT on money you haven't received.

#The 5% reduced rate — and when it might apply

Some work qualifies for a 5% reduced rate instead of 20%, including:

• installing certain energy-saving materials (insulation, heat pumps, solar — some of these currently qualify for zero-rating in Great Britain, which is even better)
• renovating dwellings empty for two years or more
• some conversions that change the number of dwellings in a building

The conditions are specific and the rules change, so treat this as a flag, not a fact: if you do insulation, renewables or renovation work, ask your accountant whether the reduced or zero rate applies before you quote. Charging 20% when 5% applies makes you uncompetitive; charging 5% when it doesn't leaves you liable for the difference.

#CIS and the domestic reverse charge

If you work in construction under CIS, there's a special rule: the domestic reverse charge for building and construction services. In plain English: when you invoice another VAT- and CIS-registered contractor for construction services (not an end user like a homeowner), you generally don't charge VAT. Instead, your invoice states that the reverse charge applies, and your customer accounts for the VAT themselves on their own return.

What it means day to day:

• Invoices to homeowners and end users: charge VAT as normal
• Invoices to CIS contractors up the chain: usually no VAT charged; the invoice must say the reverse charge applies and show the rate that would have applied
• Your cash flow changes — you're no longer holding customers' VAT between quarterly returns, which some subcontractors relied on more than they realised

Get the treatment confirmed for each contractor relationship — the deciding factors (end user status, CIS and VAT registration) need checking, and your accountant can set up your invoice wording correctly.

#Crossing the threshold: the pricing psychology problem

Here's the hard commercial truth about registering: if your customers are homeowners, they can't reclaim VAT — so the day you register, you're effectively 20% dearer to them, or you absorb some of it and take the hit on margin.

Ways trade businesses handle it:

• Don't hover. Bumping along at £85–89k turning work away ("threshold surfing") caps your growth to save customers VAT. Either stay genuinely small or push through decisively — the worst place is just over the line with prices that haven't caught up.
• Reprice properly when you register. Remember you now reclaim input VAT on materials and van costs, so your true costs fall slightly; the net price rise to domestic customers is less than the full 20%.
• Quote gross to consumers. Homeowners compare bottom-line totals. Quote the VAT-inclusive figure prominently, and make sure every quote states clearly whether prices include VAT — a quote that's silent on VAT is a dispute waiting to happen.
• Sell what the price includes. Registered, certificated businesses win work that cash-price competitors can't touch — commercial clients, landlords, insurance work.

#Record-keeping and Making Tax Digital

VAT-registered businesses must follow Making Tax Digital (MTD): digital records and VAT returns filed through compatible software — no more typing figures into the HMRC website from a paper ledger. In practice that means every sales invoice and every expense receipt needs capturing digitally, close to when it happens, not reconstructed from a carrier bag of receipts in April.

The habit that makes VAT painless is boring: raise proper invoices for everything, photograph and log receipts the day you get them, and keep business and personal money separate. TradePlanr's invoicing handles VAT on your invoices correctly — net line items, VAT calculated once at the right rate, gross total — and expense tracking lets you snap receipts on site so your input VAT is all there at quarter end. For more on staying on top of costs, see our guide to managing expenses as a self-employed tradesman.

#The bottom line

Watch the rolling 12-month threshold — it's turnover, not profit. Once registered, charge VAT on the full job, work in net figures and add VAT once, and never treat collected VAT as income. Mark up the net cost, not the gross. Check whether the Flat Rate Scheme actually helps before joining (labour-only trades often hit the 16.5% trap), confirm reduced-rate and reverse-charge treatment with your accountant, and keep digital records as you go. VAT rewards businesses that are organised and punishes ones that wing it — and none of this replaces advice from an accountant who knows your numbers.

#Try TradePlanr free

TradePlanr is a job management app built for UK trades: send professional invoices with VAT handled correctly, track expenses and receipts for your VAT return, and price jobs with the free markup and VAT calculator. Start on the free plan, and upgrade to everything for a flat £9.99/month — no per-user fees, no tiers.