Many customers are tempted to pay for plumbing, heating (& indeed many building services) in cash to avoid VAT, believing it saves money. While this might seem like a quick win, it can have significant long-term consequences. In this article, we’ll explore the risks of avoiding VAT, explain the costs of running a plumbing business, and highlight why working with VAT-registered businesses is essential for your safety and peace of mind.
Remember, by opting do business with someone willing to engage in tax fraud, you may be placing your trust in an individual who might not uphold ethical standards in other areas. It’s worth considering what other questionable practices they might employ to prioritise their own profit over your best interests.
What is VAT, and Why is it Charged?
Value Added Tax (VAT) is a tax applied to most goods and services in the UK, including plumbing and heating work. Charged at a standard rate of 20%, VAT is collected by businesses on behalf of HM Revenue & Customs (HMRC). For example, if the cost of a job is £1,000, £200 of that is VAT.
Businesses with an annual turnover exceeding £85,000 must register for VAT and charge it on applicable sales. However, VAT is not profit. It is a legal obligation, and the collected amount is passed directly to HMRC. Professional companies are required to include VAT in their pricing, ensuring compliance with tax laws.
The Financial Realities of Running a Plumbing Business
For people who don’t run a business, the distinction between turnover & profit may not always be clear. Here’s a breakdown:
- Turnover is the total revenue a business earns. For instance, if a company completes £100,000 worth of jobs in a year, that is its turnover.
- Profit is what’s left after subtracting all costs, including materials, labour, insurance, and other operating expenses. From the £100,000 turnover, a business might spend £90,000 on costs, leaving only £10,000 in profit.
The phrase “Turnover is vanity, profit is sanity” is especially relevant in industries like plumbing and heating, where high material costs and operational expenses often consume the majority of revenue.
The Financial Realities of Plumbing and Heating Work
Running a plumbing and heating business involves significant costs that many customers may not realise. Materials and components required for jobs are often expensive. For example:
- Boilers can cost thousands of pounds.
- Unvented cylinders, copper cylinders, and other heating components are similarly costly.
- Specialised parts, for seemingly simple repairs, certain products, like Geberit or Dudley toilet cisterns, are “locked,” meaning only their proprietary spare parts can be used for repairs, adding to the expense.
- Even smaller components like copper piping, radiator valves, and electrical fittings can add up quickly, especially on larger jobs.
These costs mean that even independent tradespeople find it nearly impossible to stay below the VAT threshold. While a business may have a large annual turnover, the high expenses associated with materials and operations often leave slim profit margins.
It’s important to remember that even labour charges aren’t pure profit. There are many running costs to consider, including essential expenses like business insurance, advertising (which can be a significant cost), equipment maintenance, and ongoing training. These costs quickly add up, meaning that a business’s income is often much lower than it might appear at first glance.
Why Paying in Cash Can Cost You More
Choosing to pay in cash to avoid VAT may seem like a way to save money, but it exposes you to serious risks:
1. No Proof of Work
Without an invoice or receipt, there is no formal record that the work was completed. This becomes a major problem if you need to make an insurance claim for damage caused by the work. Insurers require proof that a professional carried out the job. Without it, you could face denied claims, excess payments, and higher premiums.
2. No Warranty or Guarantees
Legitimate businesses provide warranties for their work. Paying cash without documentation means there is no contract or guarantee to fall back on if the work is substandard or incomplete.
3. Building Regulation Non-Compliance
Plumbing and heating work must often comply with building regulations. For example, gas work requires certification from a Gas Safe engineer. Cash transactions may bypass these regulatory requirements, leaving you with non-compliant installations that could cause issues when selling your home or ensuring safety.
4. Risk of Substandard Work
Businesses or individuals willing to avoid VAT may cut corners elsewhere, such as using lower-quality materials or rushing jobs. This increases the likelihood of problems and costly repairs later.
5. Liability for Faulty Work
If issues arise, the tradesperson can deny responsibility for the job, as there is no evidence they were involved. You could be left to cover repair costs out of pocket.
6. Legal and Ethical Concerns
Paying in cash to avoid VAT contributes to tax evasion. It undermines honest businesses, shifts tax burdens to others, and may expose you to scrutiny if the arrangement is uncovered.
7. Impact on Consumer Rights
Paying in cash without proper documentation may reduce your consumer rights. A formal invoice or contract typically offers certain protections, such as the right to dispute faulty work, request a refund, or demand corrections. Without these, you may find it much harder to take legal action if something goes wrong.
8. No Access to Payment Protection
When paying through legitimate channels (e.g., bank transfers or credit cards), you may be able to access payment protection schemes. These can help if the business fails to deliver, the work is substandard, or the business disappears. Cash payments, however, offer no such protection.
5. Undermining Local Economy
VAT registered businesses and individuals who do not collect VAT are also avoiding income tax by pocketing the cash. This means they are evading not only the VAT obligations but also their legal responsibility to report and pay tax on their income. By supporting businesses that avoid VAT, you may be indirectly contributing to the underfunding of public services such as healthcare, education, and infrastructure. VAT is part of the broader tax system that supports the local community and national services, so non-payment can have wider social consequences.
The Importance of Choosing Legitimate Businesses
By opting for VAT-registered businesses, you ensure that you’re working with professionals who operate transparently and comply with legal and regulatory requirements. You also benefit from:
- Proper documentation to support insurance claims and warranties.
- Accountability for the work completed.
- Peace of mind knowing the work meets regulatory standards.
When you choose to work with legitimate businesses, you’re also supporting tradespeople who invest in high-quality materials, training, and compliance to deliver the best service possible.
It's important to remember that not all businesses must be VAT-registered—many small businesses, even in the plumbing and heating industry, may not exceed the VAT threshold. However, every legitimate business, regardless of VAT registration, will always provide proper paperwork, including invoices and receipts. Regardless of who you choose to do business with, make sure to obtain clear, detailed invoices and receipts, and always do your due diligence to ensure they are trustworthy and professional.
By opting for businesses that operate transparently and within the law, you protect yourself from potential risks and ensure that you receive the highest standard of service.
Supporting Professionalism in the Industry
The costs of running a plumbing and heating business are high, from expensive materials to regulatory compliance. VAT is an almost unavoidable part of doing business above board. Customers who choose professional, VAT-compliant businesses are not only protecting themselves but also supporting the integrity of the industry.
For reliable plumbing and heating services backed by professionalism and transparency, contact ATP Emergency & Non-Emergency Plumbing & Heating. We proudly serve Bracknell, Wokingham, Ascot, and surrounding areas with expertise you can trust.
Frequently Asked Questions
- What is VAT and why is it charged on plumbing services?
VAT (Value Added Tax) is a tax added to goods and services, including plumbing and heating work, at a standard rate of 20%. VAT-registered businesses collect this tax on behalf of HM Revenue & Customs (HMRC) and pass it on to the government. It ensures businesses comply with tax laws.
- What does it mean if a plumbing business is VAT-registered?
A VAT-registered business is legally required to charge VAT on services if its annual turnover exceeds £85,000. This ensures the business complies with tax regulations and offers legitimate invoicing and proper documentation.
- Can I save money by paying in cash to avoid VAT?
While paying in cash may seem like a way to save money, it exposes you to risks such as lack of documentation, no warranty or guarantee, and complications with insurance claims. It’s safer to pay through legitimate channels to ensure you are protected.
- What are the risks of not receiving an invoice or receipt for plumbing work?
Without proper paperwork, you have no proof that the work was completed or that you paid for it. This can cause problems if you need to make an insurance claim or warranty request, leaving you financially vulnerable in case something goes wrong.
- Why are some businesses willing to avoid VAT?
Some businesses may avoid VAT to reduce costs or offer lower prices. However, this often involves tax evasion, which is illegal. By choosing a VAT-registered business, you ensure you’re working with a legitimate company that follows the law.
- How can I ensure that a non-VAT-registered business is legitimate?
If you decide to work with a non-VAT-registered business, always ask for proper invoices and receipts. Check their credentials, including qualifications, insurance, and reviews, to confirm they are a legitimate and professional service provider.
- What happens if a business avoids VAT but the work goes wrong?
Without proper documentation or proof of work, the tradesperson can deny responsibility for the job. This could leave you financially liable for repairs or additional work, with no recourse for warranty claims or insurance coverage.
- Can a business with a high turnover still be unprofitable?
Yes, turnover represents the total revenue of a business, but it doesn’t account for the many costs involved in running a business, such as materials, labour, insurance, and operational expenses. Even businesses with high turnover can be unprofitable if their costs are too high.
- Are there any legal implications of paying cash for plumbing services?
Paying cash to avoid VAT can be considered tax evasion, which is illegal. In some cases, customers may also be held responsible if they are found to be complicit in the arrangement. It’s always important to work with a legally-compliant business.
- What are the benefits of working with a VAT-registered plumbing business?
Working with a VAT-registered business ensures the work is carried out to professional standards, complies with building regulations, and provides proper documentation, including invoices and warranties. This gives you peace of mind, legal protection, and supports ethical business practices.