HMRC is making changes to the way some people in the construction industry pay VAT from 1 March 2021, with the domestic VAT reverse charge. This is being introduced to help reduce instances of VAT fraud.
This affects individuals or businesses registered for VAT who buy or supply building and construction services, and applies to standard and reduced-rate VAT services between contractors and subcontractors that are reported within the Construction Industry Scheme.
If this doesn’t apply to you, you should continue to follow the normal VAT rules.
Here, we outline the main things traders need to know about the VAT changes.
What is the VAT reverse charge?
The VAT reverse charge will see some building and construction services change the way they pay VAT.
When it is needed, they won’t raise a charge for the VAT element of their invoices, but the customer will have to recognise the VAT element and reflect it as an output in their own VAT return, while also recovering the input VAT that would have been charged by the supplier.
Put simply, a sub-contractor will require their customer, the contractor, to handle and pay the VAT for the cost of the work directly to HMRC
Normally, VAT-registered businesses or individuals would charge VAT to their customers, and then pay VAT over to HMRC afterwards.
- Find out more: self-employed VAT return
What activities does the VAT reverse charge affect?
The following services are within the VAT reverse charge rules:
- 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 when carried out as part of construction, alteration, repair, extension or restoration
- Painting or decorating the inside or external services of any building or structure
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures, including offshore installation services
- Constructing, altering, repairing extending, demolishing of any works forming or planned to form part of the land - including 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.
- Services which form part of the preparation or completion of the services listed above, including site clearance, excavation, laying of foundations, erection of scaffolding, site restoration etc.
How to prepare for the VAT reverse charge
If the VAT change affects you, there are a number of things you’ll need to do to get ready for it.
- Make sure your accounting systems software can deal with it: if your software cannot show the amount of VAT under the reverse charge, you should state that the VAT charge will be accounted by the customer, and add a note to say ‘customer to account to HMRC’ for the reverse charge
- Consider whether the change will affect your cash flow: if you’re a subcontractor and customers are no longer paying VAT, the gross value of payments coming into your accounts will be reduced, so you might need to consider changes to your day-to-day cash flow.
- Update your staff on the changes: make sure any staff you employ who deal with VAT accounting know and understand about the changes. For more information, see the government's VAT reverse charge technical guidance.
When should the reverse charge be used?
If you’re not sure whether or not you should apply the reverse charge, this chart can help:
While the charge comes into force on 1 March 2021, if the payments due on supplies were entered into the customer’s accounting system before 1 March and payment is received before 31 May 2021, normal VAT rules will apply.
Will HMRC charge you for making a mistake?
In its guidance, HMRC has said it will apply a ‘light touch’ to any errors made in the first six months of the reverse charge being introduced (so, until 1 October 2021), as long as you have tried to comply with the rules.
If you notice any errors, they should be corrected as soon as possible. Penalties will only be charged if HMRC considers you to be deliberately taking advantage of the measure and not accounting it correctly.
The VAT reverse charge is complicated, so you might want to talk to your accountant or advisor for more advice.
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