A major shakeup of VAT in the construction industry begins from March 1 2021 – and it’s likely to have significant implications if you’re a subcontractor working in the building sector.
The VAT reverse charge was originally scheduled to start in October 2019, but has now been scheduled to start in March 2021, leaving minimal time to plan for the upcoming changes around how VAT is collected and paid within the construction industry.
From 1 March 2021, the domestic VAT reverse charge must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:
for individuals or businesses who are registered for VAT in the UK
reported within the Construction Industry Scheme
SO HOW DOES THE REVERSE CHARGE WORK?
The reverse charge will apply to construction services in the UK, together with related materials, but not to materials supplied separately from any construction services.
It applies only to transactions that already fall under the Construction Industry Scheme (CIS), and only those where both the contractor and subcontractor are VAT-registered. Effectively, the VAT changes extend the scope of the CIS scheme.
VAT registered subcontractors will be required to charge the net value to the Contractor and the invoice noted with the value of the vat and the wording Reverse Charge: Customer to pay VAT to HMRC. This applies to both standard and reduced-rate supplies but not to zero-rated supplies.
The subcontractor will receive payment for the work and materials, less any CIS, but with no VAT being accounted for. Contractors will need to make sure that their subcontractors are familiar with the new rules and ensure that their accounting systems will be able to handle this change to the VAT process.
The reverse charge applies to subcontractors not the main contractor that is invoicing the end user.
EFFECT ON CONTRACTORS VAT RETURNS: -
Contractors will need to account for the reverse charge VAT. To do this they will enter the value of the VAT into box 1 and box 4 on their VAT return and the remaining purchase value in box 7. No figure for the reverse charge should be entered in box 6.
EFFECT ON SUB-CONTRACTOR VAT RETURNS:-
Sub-contractors must not enter any output tax (VAT on sales) in box 1 of the VAT Return in respect of sales to which the domestic reverse charge applies but must enter the value of the net sales in box 6.
WHAT YOU’LL NEED TO DO
You’ll need to:
HOW TO PREPARE
You’ll need to:
make sure your accounting systems and software can deal with the reverse charge
consider whether the change will impact your cash flow
make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work
WHEN YOU MUST USE THE REVERSE CHARGE
You must use the reverse charge for the following services:
constructing, altering, repairing, extending, demolishing, or dismantling buildings or structures (whether permanent or not), including offshore installation services
constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant, and installations for purposes of land drainage, coast protection or defence.
installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
internal cleaning of buildings and structures, so far as carried out during their construction, alteration, repair, extension or restoration
painting or decorating the inside or the external surfaces of any building or structure
services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
WHEN YOU MUST NOT USE THE REVERSE CHARGE
Do not use the charge for the following services, when supplied on their own:
drilling for, or extracting, oil or natural gas
extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
manufacturing building or engineering components or equipment, materials, plant, or machinery, or delivering any of these to site
manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
making, installing, and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
installing seating, blinds, and shutters
installing security systems, including burglar alarms, closed circuit television and public address systems
TALK TO US ABOUT PREPARING FOR THE VAT REVERSE CHARGE
As a contractor, you’re likely to experience cashflow pressures once the new rules apply, and that’s bad news for the financial health of your business.
You’ll no longer be able to reclaim the VAT from the subcontractor invoice as this will now form part of the reverse charge transaction.
As you can see, this is a big change, and your bookkeeping and invoicing systems will need to be checked to ensure they can handle the new system. If you need assistance with this, please do contact us and we’ll walk you through the new VAT reverse charge requirements.
More information and visual aids can be found on the VAT Reverse technical guide.
You can find out more information about supplies in the Construction Industry Scheme: CIS 340 guide.