How much discount should you really be asking for to pay cash?
We all know the score. Someone fixes a broken fence, plasters a wall, paints a ceiling or one of the hundreds of other things landlords incur costs for. You ask them how much and they say “less for cash”. Quite how much less, or sometimes not even less, is never really considered though.
For clarity not all cash is bad, not all traders are bad and the use of cash is definitely not restricted to trades.
Cash Discount
Let’s be clear. These people aren’t offering discount for early payment. This used to be quite common in some trade supplies but isn’t really a thing for landlords and the trades they use. “Cash discount” is usually a short hand for “I’m not going to declare this income which means I can take a little less than otherwise”.
Legal Basis
None. There is nothing in VAT or tax legislation that provides for any kind of concession for paying by cash. Paying a full invoice in cash of course is equally not illegal. The illegal part here is the very likely result that the income is not being declared by the trader.
Tax Relief
One of the main issues with paying cash for something is the inability to claim tax relief for the expense. The rules are pretty clear that you need to be able to show that a payment has been made and it needs to be clear what the payment was for. An invoice followed by a bank payment or car payment gives both.
A withdrawal of cash from the bank gives neither. HMRC would easily disallow any claim based on a cash withdrawal unless it is supported by an invoice. Ideally you also get the invoice signed to say cash has been handed over. An invoice on its own only proves you were invoiced.
If you cannot claim tax relief on a payment that essentially grosses up the cost to you.
What is the cost?
Let’s look at a £1,000 job that is paid in cash. First let’s set the scene. We will look at a higher rate landlord with mortgage interest forming part of their figures. This typically means a tax rate of up maybe 60% (happy to go over that sometime if you don’t believe me).
£1,000 paid “properly” will therefore save you £600 tax meaning the net cost to you is £400.
If paid cash however, and keeping the same 60% rate of tax you have to make £2,500 of profit and pay £1,500 of tax on it to get £1,000 in your hand. So that £1,000 of cash paid has almost certainly saved the trade tax (illegally remember) but actually costs you a hell of a lot more!
How much cheaper should it be then?
Well. To stress it shouldn’t. Tax evasion is illegal. Purely for theoretical purposes though let’s look at what is at stake. Trades largely go cash to avoid hitting the VAT threshold so we need to include that in the calculations.
£1,000 including VAT is £833 plus VAT. So if the VAT is being dodged let’s knock that off first.
£833 for the job won’t be all profit but by taking the turnover out of the business (and probably leaving the expenses in the business) means this is pure profit that would otherwise be taxed. If they are busy and doing OK let’s assume 40% tax. If their profits are under about £50k then it would be maybe 30% for tax and NI so not much difference.
Anyway the tax on £833 would have left them with £500.
A charitable read on this means you should give someone £500 if they want cash for the £1,000 invoice. You will still lose here though if you are paying an 60% so to make things add up £400 would be the proper equivalent cash amount.
Of course VAT and tax is only part of the issue. They could also be keeping their income low to maintain a benefit claim. With a tax credit withdrawal rate of 41% that £833 of income missing from their account means they claim £341 of tax credits they aren’t entitled to. Knock that off your £400 figure from about and to keep the country’s coffers on an even keel you should only pay them £59!
Summary
Don’t pay people cash for jobs. It simply does not stack up and will always mean YOU are paying their tax. Worse though you are volunteering everyone else that pays tax to pay more to cover the loss to the treasury.