There are significant VAT changes being introduced into the construction industry from 1 March 2021.
The rules being introduced are a VAT reverse charge for building and construction services to combat VAT fraud within the construction industry.
What is the VAT reverse charge?
The VAT reverse charge will apply to businesses who are VAT registered and are within the Construction Industry Scheme (CIS). The reverse charge will result in the end-customer accounting for VAT and not the supplier of construction services.
What are the new rules applied to?
The rules apply to VAT standard-rate or reduced-rate construction services provided by VAT registered business to other VAT registered businesses within the Constriction Industry.
If you don’t make an onward supply of construction services, you are the end customer and normal VAT rules apply.
What do you have to do?
If you are a subcontractor
If you are a subcontractor you may have supplies that should have VAT charged in the normal way and supplies which you should apply the new VAT reverse charge.
If you are invoicing a customer who will make an onward supply of your construction services, you will apply the reverse charge. For the reverse charge, your invoice total will not include VAT.
You should also include an additional note on your invoice as follows:
“This supply is subject to the VAT domestic reverse charge in accordance with VAT Act 1994 Section 55A at the VAT standard rate of 20%”.
If your customer is an end user, you should charge VAT in the normal way. This would be when your service does not form part of an onward supplier by your customer.
For reverse charge supplies your invoice must include a statement advising your customer that the reverse charge rules apply (like the example above), stating the amount of output VAT to be applied (20% if it is the standard-rate of VAT or 5% if it is the reduced-rate of VAT). Your customer will need to include that amount on their VAT return.
You do not include anything on your VAT return about the reverse charge supply.
If you are a main contractor
If you are a main contractor receiving VAT reverse charge invoices from subcontractors, you should continue to record it as a normal expense invoice and include input VAT on your VAT return.
You will also have to account for the subcontractor’s VAT on your VAT Return – in Boxes 4 and 7.
The overall effect on your VAT liability is neutral as the output VAT is covered by the input VAT.
Impact on construction businesses
The key considerations for construction businesses are:
- Accounting systems – can your accounting systems process reverse charge supplies
- Cash flow – do you rely on VAT collected from customers as working capital until this is paid over to HMRC? If so you are likely to suffer from the loss of cash flow.
Subcontractors will also need to confirm that they are working for a VAT registered business or whether they are working for an end user.
If you have any questions regarding the introduction of the VAT domestic reverse charge please contact us and speak to one of the team on 01228 904 904.