Contractors and subcontractors in the building and construction industry need to know about new VAT reverse changes. This starts next March but you need to be prepared before that.
Failing to correctly implement the new regime could mean business owners facing penalties or fines. There is also concern that the changes will create cash flow problems for a lot of businesses.
So, the advice is to get to grips with the changes now and prepare a cash flow forecast.
VAT reverse charges were due to be introduced last October and was pushed back to April this year. But the coronavirus pandemic means further delays.
As of March 2021, payments for construction works mean VAT will not be paid to subcontractors but to HMRC directly. If you’re a subcontractor receiving payments, you only receive the net of the VAT amount. This could significantly affect cashflow for many businesses in the industry.
There is no indication the March date will change again, so you have time to prepare for the changes. Do not ignore it as there is no guarantee it will be delayed further.
There are many logistical changes that will impact the building and construction industry. The new regime doesn’t just apply to contracts entered into after March 2021; it also applies to pre-existing contracts already started.
This means VAT treatment could change part way through an existing contract!
Changes to invoices
Invoices will need to refer to the reverse charge. So if no VAT is charged, the invoice must refer to the reverse charge and show how much VAT is due under it. Wording such as ‘Reverse charge: VAT Act 1994 Section 55A applies’ would be appropriate on the invoice.
It’s also worth noting the reverse charge only applies if both parties are registered under the Construction Industry Scheme (CIS), both parties are VAT registered, and VAT is chargeable on the supply.
HMRC is hoping to combat VAT fraud, which is estimated to cost the UK Exchequer over £100m per year. Historic fraud was usually related to direct tax,. But HMRC recognises an increase in VAT fraud within labour supply chains in large construction projects.
The CIS came in to address direct tax fraud and this is one of the projects devised to address VAT fraud.
You cannot use the VAT Cash Accounting Scheme for supplies of services that are subject to the reverse charge.
Exclusions from regime
The following supplies of services will be excluded from the domestic reverse charge where the customer has notified the supplier that the exemption applies:
Supplies of construction services made to end users. An end user is a customer that has to report its payments for specified supplies through CIS but does not make supplies of construction services itself. This could be, for example, a large retailer which spends significant sums annually on construction services but uses the properties for its own retail business.
Supplies of construction services between group companies. This will only apply where the customer is an end user and the supplier is part of that customer’s corporate group.
Finally, supplies of construction services between landlords and tenants.
If you are a construction business tackling your own books and accounts and are concerned about the new regime, why not contact us today for a free discovery meeting.