HMRC has confirmed this previously aborted change to the way the building industry accounts for VAT will happen on 1st March this year. All those working in the construction industry need to take note of these new rules and ensure they have systems in place to ensure they are ready.
- The purpose of the change is to reduce VAT fraud in the construction industry.
- The reverse charge does not apply to zero-rated sales eg work on new dwellings it’s only on work at 5% or 20% VAT.
- The outcome of reverse charge is that no VAT is charged by supplier of services instead the customer includes output tax in Box 1 of their VAT return instead.
- Potential cash flow impact needs to be considered as the contractor will no longer hold onto VAT on sales until their next VAT return is filed and payment made to HMRC. It may be worth considering moving to monthly VAT returns.
What work is included in the new rules?
- Suppliers need to consider the following questions for each job. If the answers to these questions are yes then they must apply the reverse charge;
|Is the customer registered for CIS and VAT?|
|Does the work fall within scope of CIS and is subject to 5% or 20% VAT?|
|Is the builder selling on the services in question to their customer? |
i.e. they are not an ‘end user’ or ‘intermediary supplier’ for the job.
- Customers receiving building services should not accept VAT charges from builders if reverse charge applies to a job
- Building materials supplied with labour –also subject to reverse charge
Supplier and customer responsibilities
- Supplier responsibilities: The VAT amount to be declared by supplier must be shown on sales invoices or at least the rate of VAT; clear wording that customer must account for VAT with reverse charge should be included. HMRC suggested wording: “reverse charge -customer to pay VAT to HMRC” or “No VAT charged –VAT Act 1994, s55A applies to this invoice”
- Customer responsibilities: Customers must tell supplier if you are an ‘end user’ or ‘intermediary supplier’ for any of the work, see definitions below;
Practical tips to help you get ready for this change
Ensure your software is up to date:
- If you use accounting software you’ll need to check it will deal with the new VAT domestic reverse charge. Most online software will already have been updated to deal with the reverse charge.
- If you don’t currently use software for your business then this is a great time to start. Using cloud accounting software like Xero makes life a whole lot simpler especially when dealing with CIS and VAT.
Consider your cash flow:
- Consider whether the change will impact your cash flow. If you are a subcontractor then it’s likely your cash flow will be impacted as you will no longer be receiving the VAT payment from your customer.
- If you are the contractor, you will likely have a short term cash flow benefit as you will no longer be paying the VAT amount to the subcontractor, however you must remember you will need to account for VAT as output tax (box 1) as well as input tax (box 4), along with the rest of your VAT accounting.
Communicate with your staff, contractors and/or customers:
- Make sure all of your staff who are responsible for VAT accounting are aware of the reverse charge and how it will work.
- If you are a contractor you should also be proactive in contacting your VAT-registered subcontractors prior to the 1 March 2021 to ensure they are aware of these changes and don’t invoice you for VAT.
- If you are a subcontractor be sure to contact your contractor customers to make them aware you will be applying the domestic reverse charge to invoices from 1 March 2021.
Please do not hesitate to contact us if you have any questions on the above.