After implementation being put off twice due to Brexit and COVID-19, the much delayed VAT Reverse Charge for building and construction services finally comes in with effect from 1st March 2021. This is an anti-fraud measure designed to counter building and construction services providers absconding with the VAT collected from their customers. The mechanism used for this is called the domestic Reverse Charge which makes the customer responsible for accounting for the VAT on the service supplied rather than the supplier. Very simply, the customer enters the VAT they would currently pay over to the supplier, onto their own VAT return as output tax due and claims this back as input tax on purchases in the normal way on the same VAT return.
By way of example, under current rules, the supplier invoices £100 plus VAT = £120. The customer then pays £120 to the supplier. The supplier pays £20 to HMRC through their VAT return.
In future, the supplier will invoice £100 and the customer pays £100 to the supplier. The customer puts £+20 and £-20 (assuming it can recover all the VAT it is charged) on its VAT return.
What services will be affected?
The VAT Reverse Charge will only apply to supplies of building and construction services liable to VAT at 5% or 20%, where the payments currently go through the Construction Industry Scheme (CIS) and where both the supplier and the customer are registered for VAT. It will not apply to supplies to final customers (end users) and it will not apply to supplies to intermediaries connected to end users who buy the services and re-sell them. Finally, it will not apply to employment businesses making supplies of staff or workers, but it will apply to labour only sub-contractor’s services. Please contact Claritas here if you need more information on CIS.
What do you need to do?
Suppliers will need to check that their customer’s VAT number is valid and that they are registered for CIS. You will need to review your contracts and decide whether the VAT Reverse Charge applies and set up the relevant accounting and bookkeeping records to record these transactions. You will also have to make sure your invoices show the correct information so that customers know they need to account for the VAT. This would, for example, be to include reference to the specific legislation (reverse charge under s55A VATA 1994) or just something to clarify the position, e.g. “reverse charge: customer to pay the VAT to HMRC”, but in all cases it is important to ensure the VAT amount is not included in the amount charged to the customer.
This will impact your cash flow and a result of these changes you may find yourself in a regular VAT repayment position so you may want to consider monthly VAT returns.
Conversely, customers will have to check that their supplier is VAT registered and tell them in writing if they are exempt from the reverse charge because they are an end user or an intermediary. Customers also need to find out how to account for the VAT Reverse charge on their VAT return.
So far so good, but the Reverse Charge is not the same as CIS. If the contract is for supply and fix, then the Reverse Charge applies to the full value even if labour and materials are invoiced separately.
Contracts might be for a mix of services, some within the scope of the VAT Reverse Charge and some outside of it. HMRC give the example of a joiner constructing a staircase off-site (not subject to the Reverse Charge) who then installs it which is within the Reverse Charge. Helpfully HMRC say you can disregard it that if that part within the Reverse Charge is less than 5%.
There are many complex areas for example, what to do when a contract changes, transitional supplies, far too many to deal with here suffice to say knowing when to apply the Reverse Charge can be difficult so it will be important to be prepared and understand what this means for your business before 1st March 2021.