VAT Domestic Reverse Charge for the Construction Industry – What You Need to Know
HMRC have announced that the introduction of the VAT Domestic Reverse Charge (reverse charge) for the construction industry has been postponed again.
Originally, the reverse charge was to be implemented on 1 October 2019, but was pushed back 12 months until 1 October 2020. The government has now announced a further five-month delay to its introduction until 1 March 2021, due to the impact of COVID-19 crisis.
The reverse charge, which effectively passes on the responsibility for paying VAT on certain services to the customer, from the supplier, are being introduced by HMRC to try and tackle fraud across the construction industry. The latest announcement also includes a change in the law which will make it a requirement that, for businesses to be excluded from the reverse charge due to being end users or intermediary suppliers, they must inform their sub-contractors of this in writing.
The information provides an overview of the reverse charge. The Government information in relation to the delay in implementation of the changes can be found here on the GOV.UK website.
Who does it apply to and when?
The Domestic Reverse Charge (reverse charge) will only apply to the supply of services between contractors and sub-contractors, i.e. not the end user. The reverse charge will include the same services currently covered by the Construction Industry Scheme (CIS), however it will now apply to the whole service including any materials provided. If an invoice includes CIS and non-CIS services, the reverse charge will need to be applied to the whole invoice.
The reverse charge will also apply to standard or reduced rated services and amounts dealt with under the reverse charge should not be included under the Cash Accounting or Flat Rate Schemes.
Once the reverse charge is implemented, a sub-contractor providing services to a main contractor will not pay any VAT on that sale. Instead, it will be the main contractor who will pay the VAT to HMRC and then recover that VAT. However, it is worth noting that depending on the timing of invoices and VAT returns, this could create a cashflow problem for businesses.
If the main contractor then sells the services onto another contractor, they will not need to pay VAT on that sale. However, if the main contractor’s customer is the end user, then VAT will have to be declared and paid to HMRC under the current rules.
How do I know when the reverse charge applies?
It is important to know the following information to understand whether the reverse charge applies:
- Is the supply covered by CIS?
- Is the supply standard or reduced rated for VAT?
- Is the customer VAT registered?
- Is the customer CIS registered?
- Is the customer the end user?
If the answer to any of the above is ‘no’, the reverse charge does not apply.
NB. If you supply services, you are the one responsible for checking if your customers are registered for VAT and CIS.
Will I pay more VAT as a result of the reverse charge?
Some businesses will find that they have more VAT to pay as a result of the changes, whilst others may be able to reclaim VAT from HMRC. If the latter is the case, it may be beneficial to change to monthly VAT returns so you can reclaim VAT more quickly.
How do I assess existing contracts on 1 March 2021?
Some businesses will have existing contracts with the same subcontractor when the changes come into force. To make the transition easier, HMRC will allow you to apply the reverse charge to all existing contracts with that subcontractor, providing more than 5% of the contracts (by volume or value) fall under the reverse charge rules.
There are also transitional rules for invoices that are issued before 1 March 2021 but are not settled until after 1 March 202. As these are quite complicated, we would advise anyone who may be affected by this scenario to contact us directly.
For new contracts starting after 1 March 2021 you will need to decide whether the reverse charge applies from the outset for each individual contract.
It is important to be aware of any change in status of your customers during a contract. For example, an end user may decide to sell on the services, in which case you may have to apply the reverse charge from the date of that change.
The above information only summarises the new rules that are being introduced. Changes made in relation to taxation can be complex and result in different outcomes for different individuals. If you have any concerns in relation to the Domestic Reverse Charge please do get in touch, we are here to help. We will then be able to provide the appropriate guidance specific to you and your business.
If you are an SME or a start up and are not already a client but would like to have more information, then please contact us for an free initial consultation.