VAT – New Reverse Charge Scheme

This is a reminder of the major changes to the VAT scheme for the construction industry from HMRC we began on 1st March 2021. The changes affect the payments made after that date. It is important that you know and understand the changes and plan for them as they may have repercussions for your cash flow.

The published guidance that has been released by HMRC is at https://www.gov.uk/government/publications/vat-reverse-charge-for-building-and-construction-services-guidance-note

It is also useful to look at and understand the published guidance on the CIS scheme itself which can be found at www.gov.uk/government/publications/construction-industry-scheme-cis-340

How will this work?

The likely situation when working as a subcontractor for a contractor the new reverse charge rules will apply to all the applications for payment or invoices that the subcontractor sends to the contractor. This means that after 1st March 2021 when you do £1,000 of standard rated work for a contractor, the following should apply; 

  • The subcontractor will invoice for £1,000 showing their supply as standard rated but NOT adding the £200 VAT to the amount due from the contractor
  • The subcontractor invoice should include a note to make it clear that Domestic Reverse Charge Applies and clearly state how much VAT is due under the Reverse Charge arrangement, but the VAT should not be charged to the contractor.
  • The contractor will pay £1,000 (not £1,200 as now)
  • The contractor’s VAT return will show £1,000 plus £200 VAT as both VAT payable and VAT recoverable.  The contractor will therefore, gain no VAT advantage from the change.
  • Because the subcontractor has not been paid £200 VAT by the contractor, the subcontractor will not owe HMRC £200 VAT
  • If the subcontractor purchases substantial materials used in subcontracted work, the subcontractor may decide to send in monthly VAT returns in order to recover the VAT they have spent on materials each month rather than wait for a quarterly repayment.
  • If the subcontractor carries out work for end consumers like domestic customers, or for customers who are not VAT registered or not CIS registered, the subcontractor will continue to bill them including VAT as they do currently. The new rules only affect supplies the subcontractor makes to firms who are not the final user of the building or structure. It is therefore, sensible from now on to keep a record of your customers’ VAT numbers and ask them whether they include the payments they make to you on a CIS return (i.e. the work is within the CIS scheme and they are CIS registered)

The change is imminent – you need to prepare

If the contractors you work for do not pay VAT after 1st March 2021 there will be implications for the flow of cash in your business, you will need to check how you can manage this.

Your invoices will need to be in a new format which: 

  • includes a note to make it clear that Domestic Reverse Charge applies
  • clearly state how much VAT is due under the Reverse Charge arrangement, but the VAT should not be added to the total due.
  • This may mean a change is needed in your accounting software.

If your invoice includes VAT with a tax point date after the 1st March 2021 and is not compliant, we will return the invoice which could delay payment.

Transitional Rules

If you have agreed to Self-Billing or Authenticated Receipts the transitional arrangements for how to determine the VAT treatment for payments due on any supplies entered into our accounting system is if the date entered is:

  • before 1st March 2021 and the payment date will be on or before 31st May 2021, use the normal VAT rules
  • before 1st March 2021 and the payment date will be on or after 1st June 2021, use the domestic reverse charge
  • on or after 1st March 2021, you must use the domestic reverse charge

 If you supply tax invoices the transitional arrangements for how to determine the VAT treatment are based on the tax point date:

  • before 1st March 2021, use the normal VAT rules
  • on or after 1st March 2021, you must use the domestic reverse charge

 Your next step

 We understand that this is a major change for everyone and may cause you concern. We therefore, encourage to do the following:

  • Read the government website
  • Be aware of cash flow implications
  • Redesign your invoices and applications for payment
  • Consider how you will monitor whether your customers are VAT registered and CIS registered

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