Contractors and subcontractors who work in the construction industry now have just under a month to prepare for the VAT reverse charge from 1 March 2021 – assuming it goes ahead as planned.
The domestic VAT reverse charge for building and construction services has already been delayed twice already. It was originally due to take effect from 1 October 2019, but was delayed for a year to allow businesses more time to prepare and avoid clashes with Brexit.
Then, as businesses struggled with the disruption caused by COVID-19, the 1 October 2020 deadline was pushed back for a further six months.
HMRC has been issuing reminders to encourage people to prepare for the change, but with the UK still under lockdown and many campaigning for businesses to be supported and regulations to be eased, no upcoming policy change is certain at the moment.
In January, a group of construction industry bodies wrote to the Chancellor to request that the scheme be scrapped altogether.
Brian Berry, chief executive of the Federation of Master Builders, wrote:
“Reverse charge VAT will restrict cashflow in a vital industry, especially to the smallest firms, at just about the worst time.
“This policy risks reversing what modest recovery the industry has made from the pandemic and will limit the scope for protecting and creating jobs at a time when our country needs a strong construction sector the most.”
So far, the Chancellor has not responded to this request and there has been no indication from the Government that the reverse charge will be delayed or cancelled.
So, assuming it does go ahead on 1 March as planned, conveniently two days before the Spring Budget, here’s what you need to know about the measure.
What is the reverse charge?
Currently, suppliers of construction services are responsible for charging their customers VAT and paying this to HMRC.
The reverse charge swaps this around, so the customer who receives a construction service is responsible for accounting for and paying the supplier's output VAT.
The idea is to prevent the instances of VAT fraud that have been reported in the building and construction sector, where suppliers have charged their customers VAT but kept the money for themselves.
The charge doesn’t apply to all construction services, however. It only applies to specified services made by businesses to other businesses that are reported under the construction industry scheme (CIS).
End-users – those who receive a construction service but do not provide one themselves as part of the supply chain – will be able to recover VAT subject to the normal rules. They will be required to inform their supplier that they’re an end-user.
How does it affect contractors?
Contractors that purchase any services that fall within the rules should receive a reverse charge VAT invoice that notifies them the charge applies. They’ll then need to account for the VAT due on their next return.
This might provide a cashflow boost, as the VAT they would have paid to the subcontractor will be ‘netted off’ in their VAT return instead.
How does it affect subcontractors?
Subcontractors will need to find out whether the reverse charge applies to their services, then inform their customers.
They’ll then need to send an invoice that includes all the information that’s usually required on a VAT invoice, but states that the reverse charge applies. It should show the amount of VAT the customer is required to account for under the reverse charge.
This might have negative cashflow consequences for subcontractors, as they’ll no longer receive the VAT they would have received as part of their payment and held onto before paying it in their next VAT bill.
Talk to us for support preparing for the VAT reverse charge.