HMRC intended to make some significant changes to how VAT is charged in the construction industry back in 2019, but it was delayed. After several changes of expected start date, 1st March 2021 is now set to be the date these changes are introduced.
It is important to review the new requirements before 1st March as there are various things you need to do in preparation.
The reverse charge scheme
The new rules affect all supplies of construction services supplied at the standard or reduced rate of VAT by VAT registered businesses to VAT registered businesses that also need to be reported under CIS (whether standard or gross status) and where neither party is the end user of the services provided. Thus it applies where both parties are registered for both VAT and CIS.
In the circumstances where it applies, the subcontractor will no longer charge VAT to the contractor, instead indicating on the invoice that the reverse charge has been applied. The contractor will then account for the reverse charge in their own bookkeeping records so that they both pay and reclaim the VAT from HMRC on their VAT return (therefore having an overall nil effect on the VAT return). Where we do your bookkeeping and VAT returns, we can deal with this for you and ensure that the correct options are available on Xero for your invoicing, but you will need to be aware of how to prepare your invoices.
It applies to the whole service (i.e materials are included, not deducted as is the case with CIS). However where materials are supplied separately, they are not subject to the reverse charge, Where there is any reverse charge element in a transaction, the whole supply is treated as being subject to the reverse charge, there is no ’splitting out’ of some supplies.
The reverse charge process does not apply to zero rated services or where the customer is not registered for VAT in the UK. It does NOT apply to services to end users or intermediaries connected with end users. END USERS are consumers or final customers of construction services, they may be CIS registered businesses but do not make onward supply of the construction services. It is important to ask if the contractor is an end user to ensure that where this is the case, the customer is charged VAT in the normal way, rather than applying the reverse charge. INTERMEDIARY SUPPLIERS are VAT and CIS registered businesses that are connected to end users, ie part of the same group of companies. The reverse charge therefore does not apply to inter-group transactions.
The CONTRACTOR will need to review their contracts with subcontractors to determine if the reverse charge applies and notify the suppliers if it will.
The SUBCONTRACTOR will need to contact customers to get confirmation from them if the reverse charge will apply.
Reviewing your VAT scheme
The changes may have a significant impact on your cash flow and the amount of VAT you pay, so it is important to consider whether the VAT scheme you are currently using remains the best option.
You will continue to pay VAT on goods etc purchased that don’t fall under this scheme and so since you will not be charging that VAT to your clients, instead waiting for it to be refunded on your next VAT return, there could be some time between paying out the VAT and having it refunded by HMRC. Because of this, it may be important to move to monthly VAT return submissions. This can be requested from HMRC, to receive VAT refunds monthly rather than quarterly to aid cash flow.
Use of the flat rate scheme (where you pay HMRC VAT calculated as a percentage of your turnover rather than all of the VAT charged less all of the VAT paid) will result in much higher VAT payments because VAT is paid on all of your sales, including any where the reverse charge applies. So businesses on the flat rate will almost certainly be significantly better off to switch to the standard scheme.
What to do now
We can help you prepare and review what this means for you, advising you more specifically about the impact the changes will have on your business and therefore the pros and cons of making changes to your VAT scheme, how to ensure you are compliant with the new requirements and setting everything up so that you are ready.
If you have any questions about this, or any other help available, please get in touch