In the final article on our value added tax series we cover the aspect of the VAT reduced rate and its use in the Isle of Man. You may recall a discussion on differing VAT rates in our first article (https://www.invicta-accounting.com/blog-post/vat-value-added-tax/)
Whilst in the UK the 5% rate does apply to certain aspects of business, particularly Energy and Power efficiency (https://www.gov.uk/guidance/rates-of-vat-on-different-goods-and-services) in the Isle of Man it still applies to home improvements (with certain exceptions) with the rationale being to aid the construction industry and encourage people to spend within it.
How does it help the industry I hear you say? All it does is mean that the customer pays less value added tax. Does not make a difference to the tradesman. A misconception!
Firstly, whilst you could look around for a trader who is not VAT registered this is not always practical or achievable. So, on an invoice of £5,000 paying value added tax of £250 vs £1,000 makes a difference to a non-value added tax registered customer. We are all looking for the best value so it is always better to pay less for something after all.
Well the government have effectively introduced this to try and bridge that gap and not penalise tradesmen for being VAT registered. At Invicta we do often hear people comment that value added tax can often price them out of the market on certain jobs and this does seem a sensible offering by Customs to ease that pain.
Now let us consider the monetary impact on the tradesman. Assume you have engaged someone to come and rip out and refit a bathroom in your home and you have just got your invoice, cue gasps of shock!
If the rate was 20%, the trader bills £6,000 (£5,000 + VAT) and has been invoiced £3,600 (£3,000 + VAT) for materials. So, his profit is £2,400 and he owes £400 VAT to Customs and Excise.
The materials element cannot make up most of the supply and must be supplied and fitted by the tradesman as part of the overall supply. Items such as flatpack or do it yourself kits are not applicable. The tradesman must purchase, supply and fit all of the items.
Using the same illustrative figures at 5% the invoice value would be £5,250.
This means profit remains the same (£5,000 – £3,600) at £2,400 however, Customs and excise now owe the trader £350.
This arises as the value added tax claimable on materials exceeds that charged on the supply.
Overall, its not a bad system for the tradesman to have this in place really is it! Provided they know exactly how to apply it and understand what is and is not eligible.
There a certain criterion to be able to apply the reduced rate and they are:
- VAT registered
- Operating in the Isle of Man
- The supply is for eligible services to an eligible property and the materials are not excluded materials.
- The supply is being made to the end customer directly
See the official guidance on the IOM government website which goes into more details on the items that are allowable https://www.gov.im/categories/tax-vat-and-your-money/customs-and-excise/technical-information-vat-duty-and-interest-rates/5-vat-on-domestic-property-repairs/
How can Invicta help?
At Invicta we understand the concessions available, we know how this scheme works and we see many clients using it to great effect
We act on your behalf, removing the administrative burden associated with VAT return preparations and submissions, ensuring that your returns are submitted on time to avoid any potential penalties and deal with any related correspondence.
Call Invicta Accounting on 01624 672358 or emails us at firstname.lastname@example.org to discuss your requirement.
All initial consultations are free!
Visit our website for more information on our other blog articles and keep your eyes peeled for future upcoming topics https://www.invicta-accounting.com/blog-post/