With VAT Reverse Charge coming into effect 1st March 2021, here's 25 FAQs you need to know.
Vat Reverse Charge... what you need to know
16 February 2021
With the VAT Reverse Charge soon coming into effect, after having already been deferred twice, there’s a lot to consider in order to be compliant with the new changes. We’ve summarised the key points below, to help you on your way to VAT compliancy.
The Reverse Charge applies to supplies made to other construction companies. But it doesn’t apply to supplies to end users e.g. the ‘client’ in a construction project. There are special rules which apply to the situation where the client’s established a Design & Build company to carry out the work for it, and a written declaration might need to be provided.
There are some services which are excluded from the scheme and special rules apply if you make a mixture of supplies which are included AND excluded.
What types of developments are included?
The reverse charge applies to supplies chargeable at 5% and 20% VAT; but not at 0%. This means construction of new dwellings will fall outside the new scheme. The reverse charge will therefore apply to any works in relation to commercial buildings and also to works in relation to existing residential buildings.
What do I need to consider?
Building contractors will need to prepare for this new scheme.
- Are you liable to use the Reverse Charge? If you are a building contractor, then the answer’s probably ‘yes’.
- Check live projects. The scheme applies to all new projects you start on or after 1 March. It also applies to construction projects in progress at 1 March 2021. See below for how to determine when you need to make the change.
- Changes to your VAT status. Where you become subject to the Reverse Charge you will become a ‘repayment trader,’ meaning that your VAT Returns will be payments due to you rather than due to HMRC. You should leave the Cash Accounting scheme and/or the Flat Rate Scheme if you use them. You should also consider whether to move to monthly VAT Returns, to help your cashflow.
Contracts straddling 1 March 2021 – ‘transitional supplies’:
The new rules apply differently to contractors who issue tax invoices or those who use either the authenticated receipt or self-billing scheme.
Where you issue invoices, the Reverse Charge will apply where the tax point’s on or after 1 March 2021.
Where you use authenticated receipts or self-billed invoices; then there are two options:
- If date on document’s before 1 March AND payment date before 1 June – normal rules;
- If date on document’s on or after 1 March OR payment date on or after 1 June – reverse charge.
Sales invoice wording & VAT Returns
Where a sub-contractor supplies construction services to a main contractor, the Reverse Charge rule means there will be no VAT ‘charge’ on the invoice.
However, you must show the VAT amount which would otherwise be chargeable, with the wording ‘Reverse Charge; customer must pay VAT to HMRC’. The sub-contractor will still include the value of the invoice in Box 6 of the Return.
The main contractor has to account for that VAT in Box 1 of his VAT Return AND claim it back in Box 4. That’s the Reverse Charge.
Notifying suppliers & customers
We believe many contractors won’t be properly prepared for the new Reverse Charge scheme. We recommend that main contractors whose sub-contractors are likely to be affected by the scheme should advise them to no longer charge VAT on their invoices.
We recommend that any contractors who will be subject to the scheme should advise their customers that they’ll no longer be charging them VAT, but that the new Reverse Charge scheme will apply.
We can help you to draft such correspondence and help you to field replies. So contact us if you’d like support with this.
We know most accounting software already deals with ‘reverse charge’ for other sectors. However, we advise contractors contact their software providers to ensure their software will be suitable for the Reverse Charge from 1 March 2021.
Our opinion on the VAT changes for the Construction Industry
We have no doubt that ‘missing trader fraud’ is an issue for HMRC. The implementation of these construction industry VAT changes will assist with this problem.
However the cashflow consequences on smaller subcontractors could be a major issue if they’re not mitigated. If this is a potential problem for your business you must consider your options. These could include:
- What VAT scheme you are on? – Cash Accounting and Flat Rate are unlikely to be available or beneficial under the new rules.
- Changing from net subcontractor status to gross status, thus ensuring higher payments are received from customers.
- Discussing payment terms with customers.
- Delaying capital expenditure until 2021 – 2022 when impact on cashflow’s better understood.
- Changing to monthly VAT returns if the business becomes a repayment trade.
This content provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
While we’ve summarised the key points you need to be aware of on the subject of VAT Reverse Charge, we suggest speaking to a professional to better understand your company’s position.
If you’d like to know more, then please contact us to speak to one of our VAT experts.
In these unusual times, it's more important than ever to unlock the potential cash and tax relief for your business.