Cash-in-hand deals can cost you a packet

Settling tradesmen’s bills in cash to dodge VAT is attractive, says the accidental landlord, but look at the pitfalls and it makes sense to pay the tax.
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Tempting though it is to spend your rental income, the sensible thing is to keep a kitty for repairs  and refurbishing — and for covering the mortgage payments while the work is going on and you haven’t got any rent coming in.
How often you need to redecorate and replace curtains, carpets and furniture will obviously depend on how much of a battering your property takes from tenants, but you should be prepared to refurbish at least every 10 years.
After eight years one of my rental flats was starting to look a bit shabby. The paint on the living room window frames was flaky, the walls needed a fresh lick, too, and the floorboards wanted re-sanding, but above all the kitchen and bathroom, while still fully functional, looked dated. 
I decided to get all the work done between tenants then re-market the property as completely refurbished.
However, just after I had accepted a quote from one builder for the work to start at the end of the summer, he rang to say that “we needed to have a little chat about the VAT”. I had failed to notice, and the crafty swine had omitted to point out until he was already hired, that his quote didn’t include the tax — unlike the other slightly more expensive ones I received.
“So now I have to pay another 20 flipping per cent?” I huffed down the phone. “Well, er no, not necessarily,” was his cagey response. He was hinting, of course, that I could pay him in cash. I could slip him a wad of notes when the job was done and, wink-wink, say no more, the payment would go undeclared. I would save several thousand pounds and the builder would avoid paying income tax.
Happy days, no? I don’t think so. I realise this sort of thing goes on all the time. I mean, who hasn’t asked: “How much for cash?” in an attempt to save a few quid on odd jobs? But as a landlord, whose bank accounts can be examined at any time by the taxman, I think it would be risky, foolish even, to attempt a VAT dodge.
The last thing I want is a visit from Her Majesty’s Revenue & Customs, pointing their finger at a suspiciously large withdrawal on my bank statement and asking: “So what was that for, then?”
Although it isn’t a crime to pay a builder in cash, it is illegal if you know that the reason you are paying cash is to avoid VAT. Good luck telling the VAT man you didn’t know you were tax-dodging if you can’t produce a receipt for the work.
There is also the problem that if you pay cash and don’t get a receipt from the builder/plumber/electrician, you have no proof of the work having been done — and therefore no guarantee that if things go wrong they will come back to put things right.
Without a receipt, of course, you can’t very well deduct the cost of the work from any capital gains tax if you sell your rental property in the future, so you will lose any benefit you have gained. And if the newly decorated flat brings in more income and the tax is paid, that leaves me with a clear conscience and a profit.
So if you are feeling tempted, just resist, and find a builder who sends you an invoice. 
  • Victoria Whitlock lets three properties in south London.
  • To contact Victoria with your ideas and views, tweet @vicwhitlock

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