The new domestic VAT reverse charge which is coming into effect from 1 March 2021 will have a huge impact on the way that VAT is collected and accounted for in the building and construction industry. This blog will outline the points to consider whilst preparing for the implementation of the changes which will apply to supplies of construction work in the UK.
The CIS VAT domestic reverse charge measure was due to commence in October 2019 and has already been delayed twice due to Brexit and the Coronavirus. It will apply to supplies of construction work from 1 March 2021 and essentially means that when a customer (i.e. the contractor) receives construction services they will have to account for and pay the VAT due to HMRC instead of the supplier. The measure only applies to construction supplies made by a business to business and was primarily introduced to counter the problem of missing trader VAT fraud in various sectors, namely to stop sub-contractors charging VAT and then not paying their VAT bill.
The reverse charge needs to be applied when all the following conditions are met:
- The supply for VAT consists of construction services and materials.
- It is made at a standard or reduced-rate of VAT.
- Between a UK VAT registered supplier and UK VAT registered customer.
- Supplier and customer are registered for CIS.
- The customer intends to make an ongoing supply of construction services to another party.
- The supplier and customer are not connected.
The CIS reverse charge does not apply to supplies of VAT exempt building and construction services nor supplies of staff or workers. It also does not apply to taxable supplies made to non-VAT registered customers nor ‘intermediary suppliers’ who are connected (e.g. a landlord and his tenant or two connected companies).
To illustrate how the CIS reverse charge works we can take a scenario where there is a VAT-registered plumber who is supplying the materials in order to renovate a bathroom for a VAT-registered contractor who is also supplying their construction services to a VAT-registered developer. The developer will then bring the new bathroom (as part of a new building project) to clients. Under the current VAT system, the plumber would invoice the contractor for the net cost of his materials, labour and work plus 20% VAT. However, under the new reverse charge mechanism the plumber would invoice for the net amount whilst stating on the invoice that ‘the CIS reverse charge applies’ and the applicable rate of VAT. The contractor pays the plumber the net amount and then accounts for output and input VAT on the supply on their own VAT return.
This will require a significant change of approach in many CIS businesses who will need to ensure that they have accounting and bookkeeping systems that can cope with the new invoicing and reporting obligations. Businesses may also need to stop using the VAT flat rate scheme or cash accounting and they also need to consider the cash flow implications of these changes (i.e. the plumber in the example above will not receive the output VAT element when previously they would have).
FKGB Accounting are here to assist with all of your VAT and other reporting needs and to ensure that those in the construction industry are prepared for these changes when they occur. Please contact us for more detailed advice and support.
