News: Changes to VAT for the building industry

15th October, 2020, Melanie Harriss

Article updated 4 February 2021

Due to come into effect on 1 March 2021, the VAT domestic reverse charge for building and construction services will significantly change the way VAT is collected in the building and construction industry. The new legislation will only apply to certain building and construction services. It will mean that the customer will now be liable to account for the VAT on goods and services they receive in purchases, rather than the supplier.

The change will be introduced in a new effort to combat missing trader fraud. Missing trader fraud occurs when individuals set up construction companies, operate as normal, but siphon off VAT as it moves up the supply chain by not declaring their output VAT.

What is the VAT domestic reverse charge?

The new reverse charge taxation system will mean that VAT will no longer be paid over between businesses. For every transaction that is made, the VAT will be registered and clearly stated on the invoice as a reverse charge. Rather than the supplier charging and accounting for the VAT, it is the recipient of those supplies who accounts for the VAT. The contractor then uses its VAT return to account for output VAT on the supplies received, instead of paying output VAT to the supplier. Subject to normal VAT rules, the contractor can then reclaim VAT on the supplies received as input tax. In most cases, this will leave no net tax payable on the transaction.

Will the VAT domestic reverse charge affect my business?

The charge affects VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used along the supply chain, until the recipient is no longer a VAT-registered business making an onward supply of specified construction services. The rules call this an ‘end user’.

The reverse charge applies only to supplies which would otherwise be subject to VAT at the standard (20%) or reduced rate (5%). It does not, for example, apply to zero-rated supplies or supplies made by someone who is neither registered nor required to be registered for VAT.

Where there is an ‘end user’, they will be expected to provide notification of end user status to its supplier. This signals that its supplier should charge VAT in the usual way.

What will I need to do to comply with the VAT domestic reverse charge?

  • If you are doing work for a private customer or non-VAT registered business (an ‘end user’), nothing will change, and you will continue using the existing VAT rules.
  • If you are a VAT registered subcontractor working for a contactor you no longer need to account for VAT on that service, but on your invoice, it must be made clear that the domestic reverse charge applies, and that the customer is required to account for the VAT. For example, the invoice must state as follows: ‘Reverse charge: Customer to pay the VAT to HMRC’.

It must also be clearly stated how much VAT is due under the reverse charge scheme, but that VAT amount should not be included in the amount charged to the customer. These sales are effectively now ‘zero rated’ and should be shown in box 6 with no corresponding VAT liability in box 1.

  • If you are the contractor receiving reverse charge supplies your supplier will no longer charge you VAT. Instead, you will account for the VAT and recover it simultaneously on the same VAT Return, subject to the normal rules of input tax deduction. You will account for both the ‘sale’ with entries in Box 1 and Box 6, and the purchase with entries in Box 4 and Box 7.

Other considerations for the VAT domestic reverse charge

If the building service that you are providing is under a single payment contract, the tax point is the date that the service is performed or completed. However, if you issue a VAT invoice or receive payment before the service is performed or completed, VAT is due on the date of the invoice or receipt of payment - whichever is earlier.

For invoices issued for supplies spanning 1 March 2021 that become liable to the reverse charge, the VAT treatment for invoices with a tax point:

  • before 1 March 2021 – the normal VAT rules will apply, and you should charge VAT at the appropriate rate on your supplies.
  • on or after 1 March 2021 – the domestic reverse charge will apply.

It is worth bearing in mind the implications the reverse charge may have on business cash flow, as VAT will no longer be paid and received between businesses.

Further guidance on the reverse charge is available on the HMRC website

This is a big change to the way VAT is handled in the building and construction industry. If your business will be affected and you would like more guidance on this scheme, please get in touch.

 

15th October, 2020, Melanie Harriss

Article updated 4 February 2021

Due to come into effect on 1 March 2021, the VAT domestic reverse charge for building and construction services will significantly change the way VAT is collected in the building and construction industry. The new legislation will only apply to certain building and construction services. It will mean that the customer will now be liable to account for the VAT on goods and services they receive in purchases, rather than the supplier.

The change will be introduced in a new effort to combat missing trader fraud. Missing trader fraud occurs when individuals set up construction companies, operate as normal, but siphon off VAT as it moves up the supply chain by not declaring their output VAT.

What is the VAT domestic reverse charge?

The new reverse charge taxation system will mean that VAT will no longer be paid over between businesses. For every transaction that is made, the VAT will be registered and clearly stated on the invoice as a reverse charge. Rather than the supplier charging and accounting for the VAT, it is the recipient of those supplies who accounts for the VAT. The contractor then uses its VAT return to account for output VAT on the supplies received, instead of paying output VAT to the supplier. Subject to normal VAT rules, the contractor can then reclaim VAT on the supplies received as input tax. In most cases, this will leave no net tax payable on the transaction.

Will the VAT domestic reverse charge affect my business?

The charge affects VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used along the supply chain, until the recipient is no longer a VAT-registered business making an onward supply of specified construction services. The rules call this an ‘end user’.

The reverse charge applies only to supplies which would otherwise be subject to VAT at the standard (20%) or reduced rate (5%). It does not, for example, apply to zero-rated supplies or supplies made by someone who is neither registered nor required to be registered for VAT.

Where there is an ‘end user’, they will be expected to provide notification of end user status to its supplier. This signals that its supplier should charge VAT in the usual way.

What will I need to do to comply with the VAT domestic reverse charge?

  • If you are doing work for a private customer or non-VAT registered business (an ‘end user’), nothing will change, and you will continue using the existing VAT rules.
  • If you are a VAT registered subcontractor working for a contactor you no longer need to account for VAT on that service, but on your invoice, it must be made clear that the domestic reverse charge applies, and that the customer is required to account for the VAT. For example, the invoice must state as follows: ‘Reverse charge: Customer to pay the VAT to HMRC’.

It must also be clearly stated how much VAT is due under the reverse charge scheme, but that VAT amount should not be included in the amount charged to the customer. These sales are effectively now ‘zero rated’ and should be shown in box 6 with no corresponding VAT liability in box 1.

  • If you are the contractor receiving reverse charge supplies your supplier will no longer charge you VAT. Instead, you will account for the VAT and recover it simultaneously on the same VAT Return, subject to the normal rules of input tax deduction. You will account for both the ‘sale’ with entries in Box 1 and Box 6, and the purchase with entries in Box 4 and Box 7.

Other considerations for the VAT domestic reverse charge

If the building service that you are providing is under a single payment contract, the tax point is the date that the service is performed or completed. However, if you issue a VAT invoice or receive payment before the service is performed or completed, VAT is due on the date of the invoice or receipt of payment - whichever is earlier.

For invoices issued for supplies spanning 1 March 2021 that become liable to the reverse charge, the VAT treatment for invoices with a tax point:

  • before 1 March 2021 – the normal VAT rules will apply, and you should charge VAT at the appropriate rate on your supplies.
  • on or after 1 March 2021 – the domestic reverse charge will apply.

It is worth bearing in mind the implications the reverse charge may have on business cash flow, as VAT will no longer be paid and received between businesses.

Further guidance on the reverse charge is available on the HMRC website

This is a big change to the way VAT is handled in the building and construction industry. If your business will be affected and you would like more guidance on this scheme, please get in touch.

 


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