THE NEW VAT RULES FOR CONSTRUCTION SECTOR START ON 1 MARCH 2021

The new rules are called “the domestic reverse charge for supplies of building and construction services” and will impact on accounting for VAT for transactions in the construction sector.

These new VAT rules are completely different to anything you may have had to deal with in the past and it is vital that you understand them.

The new “reverse charge” system of VAT will affect sub-contractors supplying their services to other contractors in the construction sector, primarily those activities covered by the construction industry (CIS) payment rules. Supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way.

The sub-contractor will not charge VAT on their invoice to the contractor for whom they are working and will not account for output VAT but instead identify the rate and amount of VAT due and notify their customer.

The sub-contractor will then be paid only the net value of the work done without the VAT.

The contractor receiving supplies from the sub-contractor will be obliged to enter the VAT on their sub-contractor’s invoice in box 1 of their VAT return as well as claiming this back in box 4 of the return.

This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors, and eliminate any fraud.

 HOW TO PREPARE FOR THE CHANGES

It is important to make sure your accounting systems and software can deal with the reverse charge and that any staff responsible for VAT accounting are familiar with how the new rules work.

You should also consider whether the change will impact your cash flow.

For our clients, we will handle everything other than the sales invoicing, but we will be on hand to advise you how to do this.

 WHO DOES THE REVERSE CHARGE APPLY TO?

Typically it will affect sub-contractors supplying their services to other contractors in the construction sector on a supply and fit or labour only basis (but not to labour agencies).

This applies if the services provided are:

  • standard rated or reduced rated, and
  • within the scope of CIS.

 USING THE REVERSE CHARGE: SUPPLIERS

You must use the reverse charge from 1 March 2021, if you are VAT registered in the UK, supply building and construction industry services and:

  • your customer is registered for VAT in the UK.
  • payment for the supply is reported within the Construction Industry Scheme (CIS).
  • the services you supply are standard or reduced rated.
  • you are not an employment business supplying either staff or workers, or both.
  • your customer has not given written confirmation that they are an end user or intermediary supplier.

The practical steps you will need to take are:

  • Check if your customer has a valid VAT number.
  • Check your customer’s CIS registration.
  • Review your contracts to decide if the reverse charge will apply and tell your customers.
  • Ask your customer to confirm whether they are an end user or intermediary supplier.
  • Make arrangements to alter your invoicing to identify the rate and amount of VAT due but not to charge it to your customer, also ensuring that a narrative appears on the invoice instructing the customer to declare the VAT on their VAT return.
  • Find out how to record the reverse chargeable transactions in your accounts.
  • Analyse the impact of the new rules on your cash flow and consider applying for monthly VAT returns.

USING THE REVERSE CHARGE: CUSTOMERS

You must account for the reverse charge from 1 March 2021, if you are VAT registered in the UK, receive supplies of building and construction industry services and:

  • your supplier is registered for VAT in the UK.
  • payment for the supply is reported within the Construction Industry Scheme (CIS).
  • the services you receive are standard or reduced rated.
  • your supplier is not an employment business supplying either staff or workers, or both.
  • you are not an end user or intermediary supplier who has notified your suppliers of that fact.

The practical steps you will need to take are:

  • Check if your supplier has a valid VAT number.
  • Check your supplier’s CIS registration.
  • Review your contracts to decide if the reverse charge will apply and tell your suppliers you will not accept normal VAT invoices.
  • Make arrangements to account on your VAT returns for the VAT identified as due to HMRC on your suppliers’ invoices.
  • Ensure that you refuse any normal VAT invoice issued to you by a sub-contractor where the reverse charge should be applied.
  • Make arrangements to pay only the net value of the work to your sub-contractors.
  • Find out how to account for the reverse charge transactions in your accounts.

IMPORTANT: If one of your suppliers does not change the way they invoice, you must ask them to speak to their own accountants.  You may not be able to reclaim VAT if it has been incorrectly invoiced.

BUSINESSES THAT ARE BOTH SUPPLIERS AND CUSTOMERS WILL NEED TO TAKE THE ABOVE STEPS IN RESPECT OF BOTH PURCHASES AND SALES

 If you are a sub-contractor using the VAT flat rate scheme, it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses from 1 March 2021.

As always please get in touch with us if you need any further advice or guidance, or if you need recommendations for the right software to ensure you comply with the rules.

 

We strongly advise you to seek appropriate advice before taking action on any of the points listed above.

All information contained in this document are correct at the time of writing.  Legislation and regulations may change at any time.

If you are in any doubt, please call us for clarification.

About us:  Leggate Associates Limited was formed by Andrew Leggate LL.B FCMA FCA CGMA who has over 40 years of tax and accountancy experience in industry and practice, and the practice is managed by Joanne Leggate FMAAT, ATT (Fellow).  Our clients range from building subcontractors to multi-million pound concerns and high net worth individuals all over the UK.  Please see our website www.leggateassociates.co.uk  or follow @LeggateAssoc on Twitter for occasional updates.

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