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I have been employing a plumber to do some work in my bathroom, and recently received the invoice. This consists of a charge for the labour, plus a list of materials used for the job, which he is also charging me for. Each material has an amount listed at both pre and post VAT (UK sales tax).

What I am wondering, is whether the plumber will have to pay the government VAT on the entire amount received from me, or just on the amount paid for labour? For example, suppose the plumber buys some piping which costs £20 (inc. VAT) from his supplier. I then pay the plumber £20 in the invoice. Will the plumber then have to pay VAT on this amount received from me? Or does the plumber not have to pay VAT on this, because in effect it was already paid to the original supplier of the piping?

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The plumber will apply for and receive a refund of the amount of VAT he paid on the purchase amount. That's the cornerstone of how VAT works, as opposed to a sales tax. So for example:

  • Pipe cost £15 to consumer -> £18 incl £3 VAT paid to the plumber
  • Pipe cost £10 to plumber -> £12 incl £2 VAT paid to the supplier
  • Pipe cost £5 to supplier -> £6 incl £1 VAT paid to the producer
  • Pipe material cost £1 to producer -> £1.2 incl £0.2 VAT paid to the material company

(Rounded approximate amounts for simplicity)

Now, at each point, the amount between (original cost VAT) and (new VAT) is refunded. So by the end, a total of £3 VAT is paid on the pipe (not £6.2); and at each point the business 'adding value' at that stage pays that much. The material company adds £1 value; the producer adds £4 value; the supplier adds £5 value; the plumber adds £5 value.

Each pays some amount of VAT on that amount, typically 20% unless it's zero/reduced rated. So the pipe supplier pays £1 but gets a £0.2 refund, so truly pays £0.8. The plumber pays £3 (from your payment) but gets a £2 refund.

So at each level somebody paid a bit, and then that bit is then refunded to the next person up the ladder, with the final person in the chain paying the full amount. The £0.2 is refunded to the producer, the £1 is refunded to the supplier, the £2 is refunded to the plumber.

  • Doesn't this depend on whether the plumber is VAT registered? If he isn't, then his own labour wouldn't end up being covered by VAT. – Ganesh Sittampalam Aug 30 '16 at 1:23
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    @GaneshSittampalam True, this does assume he is VAT registered. If he's not, then he shouldn't be charging VAT though, right? – Joe Aug 30 '16 at 14:40
  • Perhaps adding a sentence about how a sales tax works would add value for non-VAT-jurisdiction users who stumble here? Something along the lines of: "In a typical sales tax scheme, the tax is only charged to the final end user of a product. In the example above, the material company, producer, and supplier would all consider their costs to be PST-Exempt, because they are being used in production of a further product. The end result is still the 20% tax paid by the customer, but no money is collected and refunded in the interim. The difference between the two is largely administrative." – Grade 'Eh' Bacon Aug 30 '16 at 18:30

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