New VAT rules are due to come into effect this March which will impact on accounting for VAT for transactions in the construction sector. The new rules are called “the domestic reverse charge for supplies of building and construction services”.
The new “reverse charge” system of VAT accounting will affect sub- contractors supplying their services to other contractors in the construction sector.
Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the new reverse charge system, the sub-contractor will not charge VAT on their invoice to the contractor for whom they are working and will not account for output VAT, although they will identify the rate and amount of VAT due and notify their customer that the VAT must be accounted for by them on their VAT return. The sub-contractor will then be paid only the net value of the work done without the VAT.
The contractor receiving supplies from the sub-contractor will be obliged to enter the VAT identified on their sub-contractor’s invoice in box 1 of their VAT return as well as claiming this back in box 4 of the return.
This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors, some of whom were allegedly fraudulent businesses not paying over the VAT charged to HMRC.
The new reverse charge will apply to a wide range of services in the building trade, primarily those activities covered by the construction industry (CIS) payment rules. Note that normal VAT invoices will continue to be issued to domestic customers and other “end users” as defined under the scheme.
SERVICES TO WHICH THE REVERSE CHARGE APPLIES
You must use the reverse charge for the following services:
You cannot use the reverse charge for the following services, when supplied on their own:
HOW TO PREPARE FOR CHANGES
It is important to make sure your accounting systems and software can deal with the reverse charge. You should also consider whether the change will impact your cash flow and most importantly – make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work.
WHO DOES THE REVERSE CHARGE APPLY TO?
Typically it will affect sub-contractors supplying their services to other contractors in the construction sector.
This applies if the services provided are:
Supply and fit
Although the provisions apply principally to services in the construction sector, they cover all supplies of labour and materials in a single contract or transaction. This is the case even where only the labour element must be reported under CIS.
Labour only sub-contractors
The reverse charge applies to services provided by labour only sub-contractors. The labour only sub-contractor is responsible for the works carried out and therefore subject to the reverse charge provisions. This can be contrasted with a supply of staff, which is not covered (see “Employment businesses” below), since in those cases the supplier takes no responsibility for the work done.
KEY DEFINITIONS AND SPECIFIC GUIDANCE ON WHETHER THE REVERSE CHARGE APPLIES
The reverse charge is not intended to apply where a contractor works directly for an end user. End users are consumers and businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them, namely those who have an interest in the land where the work is being undertaken. Where the end user is VAT and CIS registered, the reverse charge does not apply to supplies made to them where they notify the contractor in writing that they are an end user.
Intermediary suppliers are VAT and CIS registered businesses that are in a corporate group with an end user as defined above. If an intermediary supplier buys construction services and re-supplies them to an end user in the same corporate group, they are all treated as if they are an end user and the reverse charge does not apply, if they notify the contractor that they are an end user.
Employment businesses supplying construction workers.
Employment businesses are treated differently for the purpose of the reverse charge. Supplies by employment businesses (also known as labour agencies) are not subject to the reverse charge, even if those supplies are within the scope of CIS. Employment businesses supplying construction workers are, for VAT purposes, treated as supplying staff rather than building and construction services.
USING THE REVERSE CHARGE: SUPPLIERS
You must use the reverse charge from 1 March 2021, if you are VAT registered in the UK, supply building and construction industry services and:
The practical steps you will need to take are:
USING THE REVERSE CHARGE: CUSTOMERS
You must account for the reverse charge from 1 March 2021, if you are VAT registered in the UK, receive supplies of building and construction industry services and:
The practical steps you will need to take are:
BUSINESSES THAT ARE BOTH SUPPLIERS AND CUSTOMERS
Many businesses in the construction sector are both suppliers and customers, who will be affected in relation to purchases and sales. The above practical steps will need to be taken in respect of both.
If you are a sub-contractor you should also be aware that your customers will no longer be paying you VAT, which will reduce the gross value of payments coming into your business. So you should consider and plan for the impact of this on your day-to-day cashflow. Please talk to us about projecting your cash flow forward so you can manage the change.
If you are a sub-contractor using the VAT flat rate scheme, it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses from 1 March 2021.
If you want to know more about how the VAT reverse charge interacts with self-billing and authenticated receipts please contact us.
If you are likely to be affected by these changes, we can work with you to ensure you are ready for the new system when it starts. We are cloud accounting specialists and can recommend the right software to ensure you comply with the new rules and advise on other changes to help you and your business.