In late July, Treasury minister David Gauke hit the airwaves saying that anyone who negotiates a discount with a tradesman for paying cash is ‘morally wrong’. If he’d wanted to stir up a hornets’ nest, he couldn’t have chosen a better topic during his BBC interview.
But the uncomfortable truth is that nearly all of us are tempted to try and save a little money, and that the tentacles of the black economy are never far away, especially when grappling with the building trade.
Self-builders are in an enviable position here. VAT is not levied on new housebuilding, so there is no way a tradesman can offer to knock money off if you pay cash. But those of us engaged in renovating, improving or extending existing properties are not so blessed, as VAT-registered builders are required to charge 20% on top of their invoice. Ouch.
Actually, it’s not quite that straightforward. For a start, not every builder has to be VAT registered. There is a threshold – currently £77,000 turnover per annum – below which VAT registration is optional. Most one-man bands fall below this threshold and can thus sell their labour VAT free, though materials purchased on your behalf will be subject to VAT. Add one or two employees to the equation and turnover will breach this threshold and quotations for small building work suddenly become uncompetitive. And so the building trade has a tendency to organise itself around one-man-band subcontractors, which does little for quality and much for shady deals to avoid VAT.
It gets worse. Gordon Brown, when Chancellor, introduced a 5% VAT band for various projects, such as renovating a house which had been empty for at least two years. Whilst the previous system – new builds VAT free, existing homes full VAT – was arguably unfair, it was at least easy to understand. Now you need a tax accountant’s advice just to know what rate of VAT applies.
There’s nothing illegal in cash payment, as long as it’s not done with the specific intention of tax avoidance. Nobody says: “I’ll knock 15% off if you pay me cash because I then don’t have to put the job through the books.” It’s a little more subtle than that. Cash changes hands because “it’s more convenient” or “some of the guys don’t have bank accounts”. It’s all nonsense. Those who don’t play this game, the honest Johns, get penalised, whilst the Del Boys clean up — their work habitually carried out without a written contract or any proof of payment. The present VAT rules are an invitation to cowboys.
So perhaps minister David Gauke could instead apply himself to eliminating the terrible hotchpotch which are our VAT rules — the principal cause of all this malarkey. He could do worse than to introduce an across-the-board 5% VAT rate. In fact, the Isle of Man charges 5% VAT rate on building work and has done so for more than a decade and has seen its construction VAT receipts increase.
To date, the UK Treasury has refused to consider such a move. But if it wants to reclaim some of the £2 billion it estimates it’s losing annually, the solution is staring ministers in the face. The current Chancellor, George Osborne, famously decreased the 50% Income Tax rate on the grounds that it acted as a disincentive. Exactly the same logic applies when a 20% VAT rate is added to domestic building work; it’s a shame he won’t see it.