14:42 PM, 26th November 2010, About 12 years ago
Paying tradesmen for cash in the hand jobs seems like a good idea at the time – but ends up costing landlords more.
The problem is only the tradesmen win when a landlord hands over cash for a job in return for a discount.
The discount is generally equal to VAT the tradesman will not declare for the work.
With VAT rising from 17.5% to 20% in January, the temptation to hand over wads of notes is likely to increase as well.
The main culprits are builders, plumbers and electricians who have lost a job with a construction or maintenance firm that has gone out of business in the recession.
They start paying tax at 40% as profits hit £37,500 and with hourly rates for skilled plumbers and electricians of £50 or more, reaching that pay threshold does not take long.
For every £1,000 profit a tradesman brings home in the higher rate tax bracket, they save £400 in tax.
Many tradesmen draft their accounts to match their tax returns, so if a job is not recorded for a VAT return, they do not declare the income for tax.
For a landlord paying out £8,000 plus VAT on a refurbishment project in the New Year, the total cost is £9,600. If the builder is a higher rate taxpayer and the £8,000 is profit, the tax due is £3,200.
The temptation is to pay the £8,000 cash. The builder is the big winner because the landlord has no receipt for the work, and in all likelihood no guarantee or call on the builder if any problems arise.
On top of that, the cost of the work cannot go through the rental accounts – meaning rental profits are increased by £8,000. If the landlord pays tax at the basic rate, that’s £1,600 in tax – equal to the VAT ‘saving’ – or £3,200 tax at the higher rate.
In reality, the landlord saves nothing by paying cash-in-the-hand.
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