Starting on the 1st of March 2021, VAT-registered subcontractors will no longer charge VAT on certain construction services they provide to another VAT-registered business.
The system being put in to place in its stead is called a Reverse Charge, this is where the customer will account for any VAT due themselves.
The outcome of this is that the VAT will no longer ‘travel’ around the supply chain waiting to reach the ‘end user’. This new system has been introduced in a bid to prevent Missing Trader Fraud, which occurs when construction service providers close business and disappear with the VAT collected from customers before paying the output VAT to HMRC.
Who will this affect?
Those who are affected by this change are those who fall under the Construction Industry Scheme (CIS Scheme). Those likely to be affected include:
- Contractors and sub-contractors who supply their services to larger contractors
- Contractors and sub-contractors who work through a recruitment agency
- Contractors and sub-contractors who work through an umbrella company
The Current system
The appropriate rate of VAT is charged on the services provided by the sub-contractor who themselves are registered for VAT, this VAT is then recovered by the customer if they are eligible to do so. In these cases the following rates apply:
- 20% Standard Rate
- 5% Reduced Rate – this is used for services on certain renovations and conservations
- 0% Zero Rate – used for certain residential new-builds
The Reverse Charge does not apply to Zero-Rated services, it only applies to standard and reduced rated services.
Which services will be affected by the Reverse Charge?
As mentioned above, services which are required to be reported through the Construction Industry Scheme may also now be subject to the Reverse Charge.
A full list of the services that require the Reverse Charge can be found here: Full list of services – Gov.uk
Exemptions to the Reverse
The Reverse Charge will only apply where both parties are VAT registered, where a customer is a member of the general public then the VAT would be charged as normal.
The ‘end-user’ shows an exemption to this new rule. Someone who receives the construction services but does not themselves supply them would not fall under the Reverse Charge. An example of this would be a property owner purchasing construction services.
What are the immediate affects?
For services that fall on March 1st 2021 the execution of VAT will depend on the tax-point for those services. The tax point will be dependent on either the; Date of payment or, Date of Invoice, whichever falls earliest. Should the tax-point fall on or after the 1st March 2021 then the Reverse Charge will apply, for anything predating this the normal rules will apply.
How to show the Reverse Charge on invoices?
The invoice will need to clearly state that the sale is under Reverse Charge, it will therefore show a Zero-Rated sale. Examples of this wording can be found on the HMRC website under Point 14.
Showing the Reverse Charge on a VAT return?
As a Supplier
The sale will be entered in box 6 of the return. There will be No output VAT charged or shown in box 1 of the VAT return.
As a Customer
The customer will have two entries to include on their VAT return:
- Output VAT will be accounted for on the value of the invoice and input to box 1 of the VAT return
- The value of the invoice will be entered in box 7, as a normal. Input VAT will also be accounted for and added to box 4
The value of boxes 1 and 4 should be the same and so there should be no overall impact to the customer’s VAT liability.
Preparing for the Reverse Charge
- Ensure that your bookkeeping software is able to track the Reverse Charge transactions.
- Consider that you may be both the consumer and the supplier of construction services.
- Ensure all invoices are in compliance with the new rules.
- As a supplier check both the VAT and CIS status of your customers.
- Remember you may need to provide evidence to the construction business supplying services that you are an ‘end user’. This may be documented between both parties in writing.
How Nexa Accountants can help
Nexa Accountants are always here to advise and consult with your business. As expert providers of bookkeeping and VAT services we are more than happy to discuss how we can help your business.
Reach out to our team to find out how we can help you tackle the new policies affecting your company.