VAT reverse charges update – 1 March 2021
The VAT domestic reverse charge for construction services starts on Monday 1 March 2021.
It is a major change in the way that VAT is collected in the construction industry. The reverse charge applies to supplies from businesses to businesses where both the supplier and customer are VAT registered.
The reverse charge will affect you if:
- you are registered for VAT
- you supply or receive services under the Construction Industry Scheme (known as CIS).
Where the reverse charge applies, the customer pays the VAT due directly to HMRC instead of paying it to the supplier.
When do the changes start?
The VAT reverse charge starts on Monday 1 March. The changes need to be applied to all invoices issued after this date, regardless of the contract start date.
If you issue an invoice before this date, or the customer is paying an invoice before this date, normal VAT rules apply.
If you make a mistake when trying to comply with the changes, HMRC is allowing a period of ‘light touch’ within the first six months of the new legislation, where errors will not be penalised. However any errors should be corrected as soon as possible, as the longer under-declared or overcharged sums remain outstanding, the more difficult it may be to correct or recover them.
When does the VAT reverse charge apply?
HMRC have published a flowchart that can be used to determine whether to apply the normal VAT rule or whether you need to apply the domestic reverse charge, please click here to view.
What is an ‘end user’?
For reverse charge purposes, consumers and final customers are called end-users. They are 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.
The reverse charge does not apply to supplies to end-users where the end-user tells their supplier or building contractor in writing that they are an end-user.
What type of construction services does it apply to?
- constructing, altering, repairing or demolishing buildings
- internal cleaning of buildings – if part of construction, alteration or repair work
- installing heating, lighting, air-conditioning, drainage or similar systems
- internal or external painting or decorating of buildings
- constructing, altering, repairing or demolishing any works forming part of the land – like walls, roadworks or power lines
- preparation or completion work for other specified services – like site clearances, excavation or landscaping.
For more details, click here for specified CIS 340 services.
Does this change apply to subcontractors?
Yes – If you are a subcontractor working for a VAT registered business or you hire subcontractors to work for you, the subcontractor’s invoices must show the VAT reverse charge. This means that the employer/customer will pay the VAT directly to HMRC rather than to the subcontractor.
How does this change affect your business?
Cash flow – The change means that in all business to business transactions, the customer will pay the VAT due for the services directly to HMRC rather than to the supplier. This may mean that your cash flow may be affected. If you are concerned about cash flow, you can apply to HMRC to send monthly VAT returns rather than quarterly or annually.
Accounting systems – Invoices issued must show where the VAT reverse charge will be applied and the customer must account to HMRC for the VAT amount on items marked ‘reverse change’ at the relevant rate. This means that the VAT will not be included in the total amount due to the customer. You may need to update your accounting system or software to ensure the changes can be made to your invoices.
Does this apply to the VAT Cash Accounting Scheme or the VAT Flat Rate Scheme?
Yes – You must apply the VAT reverse charge if all the conditions are met, you will not be able to use the Cash Accounting Scheme or the Flat Rate Scheme if the reverse charge applies. If you regularly supply or receive services that meet the conditions, perhaps consider if these schemes are still appropriate for your business.
We Can Help You
Our construction team are happy to help if you have any questions or would like further information, please do not hesitate to contact Sarah.Duncan@ashtonslegal.co.uk or Laura.Baines@ashtonslegal.co.uk for assistance.
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