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Construction Reverse Charge

A new of set of VAT rules specifically for the construction industry will be introduced from 1 March 2021 (after numerous delays).  The aim of the new “Construction Reverse Charge” is to cut down on fraud in this sector and will have quite wide ranging effects for businesses.

When a transaction is caught by the new rules, the customer rather than the supplier will account for the VAT on the sale to HMRC.  The supplier will never receive the VAT from the customer.

The Construction Reverse Charge will only apply to VAT registered businesses that are CIS registered, are supplying services to another VAT and CIS registered business, and where the customer is going to use the construction services they buy in to make their own onward supply of construction services.  The Construction Reverse Charge does not apply to services to “End Users”.  This means that invoices to property owners, or to a business which plans to sell or rent out the building being worked on, won’t be caught.  However, if the customer is a business it will be their responsibility to tell the contractor that they are an End User and so are exempt from the Construction Reverse Charge.

The new rules will apply to most supplies of building and construction services (including builders, joiner, electricians, plumbers, painters, air conditioning installers and many ground workers), and will be relevant to both standard rated and reduced rated services (it won’t be relevant for zero rated new builds).

The new rules are best illustrated by an example of a VAT registered subcontractor who would under the current rules raise an invoice of £1,000 + VAT = £1,200 gross to a main contractor for work on an extension.  Under the new rule from 1 March 2021:

  • The subcontractor will send and invoice for £1,000 to the main contractor.  The invoice will still need to show the VAT which should be paid to HMRC on it even though the subcontractor will not put this VAT on his own VAT return or even pay it over to HMRC.  Suggested wording to be included on the invoice ‘reverse charge: Customer to pay the VAT to HMRC, VAT rate applicable 20%’.  The net sale should be included in box 6 of the VAT return.
  • The main contractor will pay the subcontractor £1,000 (rather than the £1,200 under the current rules).
  • The main contractor will add the £200 of VAT that needs to be paid to HMRC on the subcontractor’s sale onto his own VAT return as sales VAT.  The transaction should be recorded in box 1 of the VAT return.
  • The main contractor can then reclaim the £200 of VAT on his VAT return in the same way as normal. The transaction should be recorded in boxes 4 and 7 of the VAT return.

There are also exemptions for sales between connected businesses, and supplies between a landlord and tenant.

There are a number of steps that should be followed from 1 March 2021 when considering if the new rules apply to the supply being made:

  1. Check the validity of the customers VAT number https://www.gov.uk/check-uk-vat-number
  2. Check the customers CIS registration https://www.gov.uk/use-construction-industry-scheme-online
  3. Confirm that the services being carried out are within the reverse charge scheme https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
  4. Confirm with your customer that they aren’t the end user or intermediary supplier (see below for more detail)
  • If they are then obtain written notification (letter / email / part of contract)

A key challenge for businesses will be getting their systems in place to deal with the new rules.  Many of the accounting software providers have now provided updates to incorporate these new rules and have created some additional VAT codes.  If you would like more information on the new codes then please follow this link.

The biggest burden will be on main contractors who use a lot of subcontractors, and on anyone who needs to confirm their eligibility as an End User.  There will also be cashflow implications for subcontractors who use the VAT they collect from their customers to help pay the bills before paying it to HMRC for a few months down the line.

If you are concerned about how these changes may affect you, please talk to your usual Dodd & Co contact or speak to Faye Armstrong or Jo Coleby.

 

<Sep 2021>
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Sep 26

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