On 1st March 2021, the VAT domestic reverse charge for building and construction services came into effect. If your business operates in the building and construction industry and is CIS registered, you must now comply with new rules when accounting for VAT on specified supplies.
The legislation – part of the government’s efforts to crackdown on fraud and abuse in the construction sector, was originally due to be introduced in October 2019 but was delayed by Brexit.
The reverse charge applies to any business providing construction supplies. Unless the business receiving the supplies can demonstrate that they are the final customer or ‘end-user’ (a business that does not make onward supplies of the building and construction services in question but is registered for CIS), they will be responsible for reporting and paying the VAT – rather than the supplier.
Are you ready?
We’ve had plenty of notice about the reverse charge, so hopefully, your business will be fully prepared.
Here are the key questions you need to have asked yourself:
Do you know which of your transactions are affected?
The extent to which you’ll be impacted will depend on whether you are a contractor, subcontractor – or both.
If you’re a contractor, you must review all the contracts you have with subcontractors and decide if the reverse charge applies to the services you are receiving under your contracts. If it does, you need to notify them.
If you’re a subcontractor, you must contact your customers to get confirmation from them if the reverse charge will apply, including confirming if they’re an end-user or an intermediary supplier.
Use the flow chart below to check if the reverse charge applies to supplies you’re making:
Are your accounting systems & processes ready?
You’ll need to have made adjustments to your accounting systems and processes so that VAT is recorded and reported in line with the new rules.
When invoicing customers for supplies subject to the domestic reverse charge, your invoice must:
- Show all the information required on a VAT invoice.
- Carry wording to indicate that the domestic reverse charge applies and that your customer must account for the VAT.
- Clearly state how much VAT is due under the reverse charge.
Do your staff understand the new rules?
Everyone in your team who needs to know should have a good understanding of how the new legislation works.
Will the change impact your cash flow?
The introduction of the reverse charge will likely have an impact on the cash flow of some businesses. If you’ve previously relied on using the VAT you charge as working capital; you’ll need to consider the effect of a reduction on your cash flow. And when it comes to completing VAT returns, the change will result in some businesses moving from a net claim position to making a payment. If this is the case for you, you should make an application to HMRC to move to monthly rather than quarterly returns so that payments due to you are speeded up.
It’s worth keeping in mind that the reverse charge’s introduction comes with new HMRC powers to make adjustments to CIS returns.
From April 2021, if an employer is unable to provide evidence to prove that their claim is genuine, HMRC will correct the return, and the employer will be unable to recover any further CIS deductions that may be due until after the end of the tax year. The employer will start the new tax year afresh – but their CIS returns will continue to be closely monitored by HMRC.
Does your business need assistance preparing for and complying with the new VAT domestic reverse charge legislation? Inca can help you. Our experience working with businesses in the construction and building sector means we have an in-depth understanding of the industry and how the new rules apply.