VAT Reverse Charge for Construction Services: Expectations leading up to March 1st
From 1st March 2021, workers in the UK construction industry may have to handle and pay VAT in a different way following the introduction of the new VAT reverse charge system. VAT-registered subcontractors will no longer charge VAT on certain construction services to another VAT-registered business. Instead, the customer will ‘self-account’ for any VAT due – this is known as the Reverse Charge. Originally due to come into force on 1 October 2019, the VAT reverse charge on construction and building services had been pushed back for 12 months and was again postponed until 1st March 2021 due to the coronavirus pandemic.
The Reverse Charge is being introduced in the construction industry to tackle ‘missing trader fraud’. As part of missing trader fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. The construction industry is considered a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax. The Reverse Charge rules will mean that the VAT will no longer flow around the supply chain and is not paid until it reaches an ‘end-user’ or private individual.
Will the VAT Reverse Charge be a problem for my business?
It is assumed that almost every contractor will be affected. Particularly if you pay other people for work which you bill on, or get paid by other contractors. If this includes you, it is time to ensure you are prepared for the upcoming changes as you must be ready to comply immediately from 1st March 2021 onwards.
The most important thing to consider is the negative effect on your cash flow. The VAT reverse charge will most likely reduce your incoming cash flow while your outgoings remain the same as you’ll still be paying VAT when you buy from many of your suppliers.
Although the VAT goes directly to HMRC, you’re still paying it. However, when other traders buy from you (if they aren’t end-users), you won’t be able to charge the additional 20% VAT. In conclusion, you will have fewer gross payments coming in than previously.
How should I prepare for the VAT Reverse Charge?
- Make sure that your accounting systems and software can handle Reverse Charge transactions. It is worth noting, your business may be both a customer and supplier of construction services at times.
- If you’re a supplier and affected by the Reverse Charge, make sure your invoicing system complies with the new rules.
- Check with your customers to confirm whether the Reverse Charge impacts your sales, purchases, or both. HMRC recommend that suppliers check the VAT and CIS status of their customers
- Communicate with subcontractors and review contracts to see if the Reverse Charge applies. When they invoice you for their services, they can no longer charge you VAT under the new system, because you will owe it to HMRC directly instead.
Read our detailed guide here for more information on preparing for the upcoming VAT Reverse Charge.
How EKWilliams Accountants can help
As we mentioned, the VAT domestic reverse charge was originally due to come into force in October 2019. This was pushed back until October 2020 to enable businesses to prepare for it. Due to the pandemic, the decision was made in June 2020 to delay this by a further 5 months until 1st March 2021. Whilst there is no current indication about postponing this change again, you should keep updated with any announcements in relation to the VAT Reverse Charge.
If you have any queries about the upcoming VAT reverse charge and the impact on your business, please contact a member of our team today on 01942 816 512 or request a call back here.