Paying builders in cash Pro’s & Cons.

When I’m designing say a house extension, internal alterations, preparing the building warrant drawings and structural calculations Clients always ask about the build cost and how they can save money or get more for the money they have. From time to time I’m asked whether savings can be made by paying the builder in cash. Now we know.. allegedly.. that if you pay in cash some builders may not charge you VAT or give you a discount.

Can I pay the builder in cash save VAT and get a discount?

YES… but beware! I discourage you to do so. The following looks at paying cash, the various ways of doing it and how you can do just as well and often better. There is more detail on the pro’s and cons at the end of this page. I hope you find the following helpful when deciding how to spend your money and how much of a risk you want to take with it. In terms of the law I don’t explore this here.

Is a better/ alternative way of doing it!

YES. There are some pretty savvy builders and tradespersons out there who know that good customer service coupled with honesty and transparency is very good for business. Often these types of builder/ trades persons will overlook the odd extra to avoid disputes. They would rather have a satisfied customer who recommends them than the extra , often small, amount of profit.

It’s worth bearing in mind that a project can be fun and very rewarding if you go about in the right way. Consider; how much of your time you want to commit vs how much money you want to save.

Basics of vat.

You’ll have seen lots of “VAT free offers” but what does that mean?  When you go to a major plc uk retailer offering a vat free deal to buy, say a television, what they are actually giving you is simplistically a discount. The retailer will still need to pay to HMRC the portion of VAT applicable to the selling price and you will get a receipt. You should normally be covered by the consumer protection act.

In the domestic construction market this can work in a different way. The current threshold before you have to register as with HMRC for VAT is £85000.00. If you are a building contractor and buying materials then this level of turnover only equates to a couple of extensions a year if they are going through the builder’s books.

You buy the materials and don’t pay vat on the labour.

This is quite common and entirely above board. For example. You buy tiles for a bathroom. You negotiate with the tile supplier a price of £ 100.00 plus vat so you pay £120.00. You find a local self employed recommended tiler who keeps their turnover below £ 85000.00 (the vat threshold) and they charge you £100.00 to fix the tiles. There is no vat to pay on the labour so the total cost of your job is 120.00 + 100.00 = £220.00

If you ask the supplier / showroom to price, organise and do the whole job then the quote would be along the lines of  £100.00 for the tiles + £100.00 labour = £200.00 plus the time, profit and responsibility of organising your job.. say 30% = £60.00 so you pay 200.00 + 60.00 = 260 plus vat = £312.00. The difference is £92.00.. well over a third as the supplier /showroom should be turning over more than the vat threshold thus they need to charge vat on the whole amount.

When you scale this up in terms of an extension or attic conversion then the savings appear to be substantial. If you want to make these kind of savings you’ll need to accept some risks. Here are a couple of  the key points…

  • If you’re buying the materials direct from the supplier and they fail.. say a central heating boiler then it is you that will probably need to chase up the manufacturer. Provided your installer has carried out the work correctly then they are in the clear. Generally you will need to do the legwork to find out who is responsible for the failure.
  • You’ll need to be very much hands on; a good organiser, have a good technical knowledge coupled with negotiating skills to realise these kinds of savings when you have lots of different trades to deal with. You’ll be the project manager.

Part cash / part through the books

In my experience this is quite common. Typically the Client and the builder come to an arrangement whereby the big ticket items are through the books and other parts of the work are not. This seems to many like a good deal. Some builders will sell this approach to you and at the beginning of a project, everyone is “happy and getting on well”!

Unfortunately this relationship may not always last… primarily because the builder wants to make as much profit as they can and you want to save as much as you can. This can become quite inequitable as Clients often don’t have the experience or technical knowledge to negotiate with the builder on equal terms.

One of the big issues is that if something goes badly wrong then you have a problem that can be difficult to deal with. For example, if there is an insurance claim the insurance assessor will look at the contract, if any, you have with the builder and quickly deduce that something is “off the books” and probably reject any claim.

In summary and based on experience. To make this work for you then you either need to be very lucky or have a lot of experience to get your project delivered on time, at the original price agreed and completed with a retention sum to cover defects and all the guarantees on the windows, doors, tiles, “velux” windows etc.

All cash In hand. 

A very few builders may still be able to buy their materials for cash from a builders merchants and avoid the VAT but there are very few builders merchants now, if any, that will do the builder a cash deal and not charge them the 20% VAT on the materials.  As a domestic customer you probably will be paying VAT on the materials.

Without being too explicit there are a few builders that operate by buying materials from a builders merchants for cash (pound notes) plus VAT. They pay all their subcontractors and casual labour in cash. By doing so they aim to for example:

  • Avoid putting monies through their bank account that will alert HMRC (or so they think) and thus try and avoid paying tax and VAT on the labour element. Not good news for you if HMRC start an investigation halfway through your job!
  • The Construction Industry Training Board (CITB) charge a levy partly based on the wage bill.  This CITB levy is used partly to train apprentices in the construction industry and improve safety training. By paying as many people as possible in cash these builders aim to avoid this levy.
  • A builders insurance premium is partly based on turnover so by not declaring turnover their premiums tend to be lower… that is if they are insured at all. If you need to make a claim against the “cash / part cash” builder then if they are underinsured you have a major problem, just the same as car insurance. 

In summary..the cash approach will appear to lower the initial cost of the job but you should ask yourself… is the saving vs the extra risk I’m taking worth it? There is more on this later on this page in the pro’s and cons.

In reality what will probably happen is that builder will appear to pass on just enough of the perceived savings to you until they get you on the hook and pocket the rest. This will often leave you with no contractual control over your money, quality of workmanship, timing of the job, possibly uninsured and in a very poor position to argue when hit with extras. This is because you probably won’t have a written agreed format / mechanism / contract for dealing with the situation. You are at the mercy of the builder…well not quite… you can “fire” the builder and change horses… but it will cost you…

Types of builder & their finances

Well established builder. A good well established reputable builder is less likely, if at all, to offer a discounted price for pound notes. They may ask for cash if you have a bad credit rating though!

Well established builders are usually busy and have robust financial systems in place for handling the money. It’s often much simpler for them to accept a bank transfer and concentrate on completing projects on time, keeping their customers satisfied and winning new business. They are often consummate professionals… their work, site safety record and reputation speaks for itself. This comes at a cost but you will reduce your risk and often benefit from their years of experience at getting your project “right”

Buying the job builder. This is a legitimate form of contracting. When you have say ten plus employees and loyal sub contractors you need a lot of work to keep them all busy. If you have two big jobs with a gap in between then builders may price low just to keep their squad busy in the knowledge that they have the next big job starting soon. In my experience some builders will be open and honest about the fact that they have a gap in their programme of work and do you a good deal with a strong guarantee!

If you can find a builder in this position then you’re on the road to a good deal. Often you’ll find that they want paid regularly to ease cash flow and to reduce the financial risk to themselves.

Just starting out type of builder. All builders need to start somewhere to build their business. Many, when starting up a will often have lots of trade experience and will be keen to impress.

Rest assured it does not always follow that a large firm is good and small is not!

Please read on if you wish more detail on the pros / cons and a few more points to consider

One of the basic keys to a successful project relates to the financial transaction between the homeowner and the builder. For the process to work well the homeowner and builder both need to be financially protected to an acceptable degree and have confidence in each other. Ruskin articulates this well as follows:

John Ruskin 1819 – 1900

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

Looking again at some types of builder-

  • “Well established builder with a good reputation” Well they do what is says on the tin! They may be a little more expensive as many will have spent years; investing time in their business, gaining experience, training staff, purchasing plant and equipment and so on. In return you get greater assurance that your project will be a success in all aspects; time, money, service, guarantees on workmanship and materials and so on.

  •  “Buying the job” type of scenario.

Fundamentally there is nothing wrong with this type of arrangement. I’ve listed below some additional points to consider.

  • If the price is too low there is probably something wrong. Builders are still pretty busy at the moment (May 2022) so are they really going to do the job at a big loss when there are other fill in jobs about?
  • Will the builder agree to finish my job on time if their circumstances change?
  • Will the builder agree to pay me compensation should they not complete at the agreed time? This can happen if their next big job is brought forward.

Just starting out type of builder

This can deliver good results as often new businesses are keen to impress and expand their customer base.  Some new start businesses are well resourced financially some less so. Other points to consider are:

  • Unless well financed the start-up will require more frequent payments, often weekly. This is ok provided the work has been carried out correctly and you are happy to work on weekly payments.
  • The quality of workmanship can be variable and should be monitored but this applies to all contractors. The main thing is awareness.
  • Start-ups are thought more likely to go bust. The key is to be alert to the arguably greater risk and take steps before work starts to reduce the impact should this unfortunate scenario occur.
  • All builders particularly favour customers who pay the agreed amount on time.  If you take this approach you will reap the benefits particularly with the “start up” as often cash flow can be an issue. If you help them with this they will often return the favour.

Cash in hand builder – Many customers select this type of builder. Based on my 35 years plus experience often something lets them down and with hind sight many say they would have taken a different approach. Unless you have a family or business connection to the builder, common complaints are;  getting hit sometimes badly with “extras” and not having the experience and real technical knowledge to deal with the builder. When you couple this with no contract or paperwork then as a customer you are in a poor position.

So when weighing up the all cash/ part cash offer some things to consider are:

  • The cash builder is unlikely to enter into any form of written agreement with you as a disgruntled customer may just forward any paperwork to HMRC.
  • Your chances of getting a meaningful written receipt for the cash you have handed over is slim. If something goes badly wrong how will you prove you have handed over all or some of the money?
  • Also, think about the part cash .. part through the books type of offer… what bit are you going to get a receipt for?
  • What if there is an accident on site and sadly someone is hurt… will probably find the the Health and Safety Executive taking a particular interest in you and they will ask to see all your paperwork relating to the CDM management on the job. For more information on CDM please click here.
  • What will you do if the builder does not turn up for a few weeks or just disappears?
  • Will the builder come back, if say a month after completion water starts to come in the roof or cracks start appearing and so on?
  • Will the builder be insured adequately and how will I check if there is no paperwork?
  • If the builder damages my house during the work will my insurance company pay out?