House Extension VAT - can it be avoided?

In most cases no it cannot.  It does not take a building business long to exceed the £73k turnover limit (2011) to qualify for charging its customer value added tax on behalf of the government.  Therefore any builder saying that you don't need to pay VAT is lying and should be avoided.

However, there is a way of 'reducing' the VAT element of a house extension scheme - one is legal and above board the other is highly dubious and illegal.  Lets talk about this last option first.  Its called paying your builder CASH!

The 'building game' (legit and otherwise) is rife with cash payments from their clients or customers so lets not beat about the bush. The loss of revenue to the government is massive and could probably build two new hospitals per year.

With VAT now at 20% it really can be a deal breaker as to whether or not a house extension ever sees the light of day from some homeowners so I understand the temptation.  However, it is not without risk.

Bearing in mind that most cash payments are not recorded as being received for work done from the builder, this can leave you exposed to incomplete paperwork should anything go wrong with the work or you are short changed on the work or materials provided.  All the builder has to do is deny he ever completed the works should a dispute arise and walk away.  Proving it in court would become difficult.

Therefore you can perhaps see why paying your builder cash should be avoided.

The potentially legal way of reducing your VAT tax burden for a house extension is to employ a project manager on a fixed fee or monthly wage and for you to pay the trades direct when approved by the project manager.  Please note that I used the term 'reduce' and not 'avoid' or 'evade' VAT.

This way many of the trades and perhaps including your project manager may not exceed the turnover limit for having to register for VAT.  This way you are not charged VAT on the labour element of the works for unregistered trades.

You will still have to pay the VAT on materials for house extensions irrespective of which ever method you pay your builder or trades direct.

Regretfully, many homeowners do not go down this route of employing their building trades as most project managed house extension schemes do not have a fixed price for securing the budget costs so the homeowner is forced to take a chance that the budget costs offered by the project manager are realistic or over cautious.

However, if the homeowner is willing to take a risk with his house extension project manager then the potential savings are massive.  Not only VAT of the building trades labour rates can be saved but also the main contractors margin for profit which can be as much as 40% plus VAT on top of that.  Why this method of home extension work has not taken off more commonly is a mystery.