Reverse charge VAT will be in on the 1st of March
Those working in the UK’s construction industry will have to handle and pay VAT differently from 1 March 2021, unless there’s another last-minute Government U-turn.
This is when the VAT domestic reverse charge for building and construction services, to use its full name, will finally take effect at the third time of asking. In this article, we’ll refer to it simply as the ‘reverse charge’.
The reverse charge affects VAT-registered businesses that operate under the construction industry scheme (CIS). These are usually tradespeople who either take on contracts or subcontract others within a typical supply chain.
The reverse charge was originally due to kick in from 1 October 2019, but that was put on hold for 12 months to give businesses more time to prepare for the UK’s exit from the EU.
Then, on 5 June 2020, after many construction sites in England downed tools during the first national lockdown in April 2020, the introduction date of the reverse charge was put back by another five months – from 1 October 2020 to 1 March 2021.
Speaking at the time, a HMRC spokesperson said extending the deadline would “help businesses overcome the effects that the pandemic has had on them and give them more time to prepare”.
If you’re VAT-registered and work in the construction industry, the new rules are complex and change how you account for VAT.
As a result, you might need to change how you present information on your invoices to your customers and how you prepare your VAT returns. If you are not VAT-registered you may find that you now need to register for VAT.
What is reverse charge VAT?
The reverse charge puts the onus on the customer who receives a construction service to account for the supplier’s output VAT and to pay this output VAT to HMRC, instead of to the supplier.
It intends to reduce cases of VAT fraud that have been reported in the building sector, where suppliers have charged their customers for VAT but kept the money for themselves.
The charge applies to specified services made by businesses to other businesses that are reported under the CIS, while the customer can recover VAT subject to the normal rules. Not all construction services will fall within the new rules.
Contractors & the reverse charge.
From 1 March 2021, contractors should receive reverse charge VAT invoices for the CIS-regulated construction services they purchase, which are covered by the new rules.
Any VAT due needs to be directly accounted for on their next return, instead of paying VAT on CIS-related supplies on payment of the supplier’s invoice.
This might provide a cashflow boost because the VAT previously paid when paying a subcontractor is ‘netted off’ in your VAT return instead, rather than being physically paid. For those needing to plan their cashflow around the new arrangements then we have a complimentary 3 month cashflow financial budget tool available in our download section
Subcontractors & the reverse charge?
From 1 March 2021, subcontractors will be notified by the
contractor where the reverse charge applies.
Where the reverse charge does apply, they will need to include all the information that is normally required on a VAT invoice, except no VAT will be charged.
See the next in the series of VAT in the construction sector we look at a practical example and a checklist of what needs to be done.
For further assistance:
Please click on the link to Marcus Bishop Associates Associate for specific accounting advice.