Keeping clients informed about reverse charge VAT in the construction sector has been a little like the on-off Brexit negotiations for the last two years or so.
The reverse charge was initially due to commence from 1 October 2019, before being delayed for 12 months due to Brexit. Then COVID-19 saw the second implementation date of 1 October 2020 put back to 1 March 2021.
At Thomas Barrie & Co, it’s full steam ahead in terms of preparing our VAT-registered construction clients for the reverse charge applying to their sector in just over six weeks.
But there’s every chance of a third delay being announced between now and then, so be aware this is accurate at the time of writing and subject to future change.
What is the reverse charge?
Firstly, the reverse charge does not apply to all construction services. It applies to VAT-registered businesses that make specific services to other businesses through the construction industry scheme (CIS).
The business that receives a construction service will need to account for the supplier’s output VAT and then pay this to HMRC. They will be able to recover VAT, subject to the existing rules.
The reverse charge will apply to standard rate VAT or reduced-rate construction services provided by VAT-registered businesses in the UK. It will not apply to zero-rated supplies of services.
How will it affect contractors?
Contractors should receive reverse charge VAT invoices for the CIS-regulated construction services they buy. These are covered by the new rules, scheduled to be from 1 March 2021.
Any VAT due needs to be accounted for on their next return, instead of paying VAT on CIS-related supplies when paying a supplier’s invoice as is the case right now.
This could boost cashflow for construction contractors as the VAT previously paid when paying a subcontractor is ‘netted off’ in your VAT return instead, rather than being physically paid along with the invoice.
How will it affect subcontractors?
For subcontractors, the rule change should result in the contractor notifying them that the reverse charge applies for the service they’ve supplied.
Where the reverse charge does apply, subcontractors will need to include all the information usually required on a VAT invoice. The big difference is no VAT will be charged.
Instead, the invoice should state the reverse charge applies and the amount of VAT the contractor has to account for under the reverse charge.
In terms of cashflow, subcontractors might be worse off as the VAT currently paid with the invoice and held before paying the bill will no longer be available.
How can we help?
Regardless of a third delay to the reverse charge potentially being around the corner, this tax change will not be going away and it pays to be switched on.
For more information, read about our VAT service, email us at firstname.lastname@example.org or call us on 0141 221 257.