New VAT rules are about to come into play, which will have an impact on the cash-flow of thousands of small and medium-sized businesses in the UK construction industry, specifically those who are registered with the Construction Industry Scheme (CIS).
If you’re in the construction trade and are unsure about how these new VAT rules could affect your business, read our handy guide below which outlines what the new domestic reverse charge is and how it will be implemented.
What is the domestic reverse charge?
Currently, UK companies account directly to HMRC for the VAT they have charged their customers with most using the accumulated VAT as a form of working capital – but from 1 October 2020, this will no longer universally be the case.
For those in the construction industry, the new reverse charge VAT initiative will change this and is aimed at reducing tax fraud caused when subcontractors disappear before passing on payments to HMRC.
These new rules apply to suppliers of certain services specified under the CIS, and on occasion, certain products too. As a result, thousands of businesses in the construction sector – particularly those who supply services to main contractors – are set to be affected by the domestic reverse charge scheme.
How does the UK reverse charge work?
Put simply, after the new rules come into effect, CIS registered suppliers will no longer be required to charge VAT on the invoices they issue to their contractor customers for construction-related services.
Under the new regime contractors themselves will have to account for the VAT that their subcontractors have charged on the services provided to them, and pay the VAT they would ordinarily have paid to them directly to HMRC instead and account for it via their VAT return.
For contractors who are subject to the new reverse charge rules, subcontractors will need to issue them with domestic reverse charge VAT invoices which should include a statement about the new VAT rules and that the invoice has been issued is subject to them.
Who is affected by these new arrangements?
For these new rules to apply both customers (or contractors in CIS speak) and suppliers (subcontractors) need to be registered with the CIS, as well as for VAT. In addition, the invoice must be subject to standard or reduced rate VAT and be for construction services and/or materials.
It’s important to note that the new tax changes are not applicable to invoices where the service supplied is in certain excluded construction-related areas, for example, surveying, consultancy work, CCTV and HVAC systems, and supply of building machinery – as long as these services are supplied on their own.
If in doubt about whether these new arrangements affect you, it’s worth checking the HMRC website which provides a comprehensive list of the types of services that are either included or exempt.
As a general rule of thumb, when a supply chain features at least one reverse charge element, the whole supply would be subject to the new reverse VAT charge. As an example, the new rules would not apply for the supply of double glazing units for a development, but they would if the supplier charged for them alongside charging for their installation.
As CIS payments are currently apportioned with zero deductions made on the materials element of the invoice, this new approach represents a change that those affected need to be aware of.
What’s more, providing that the buyer and supplier are in agreement, once the initial supply has been made and is subject to reverse charging, subsequent supplies can have it applied automatically. The ultimate aim of this is to shorten the time it typically takes to work out whether a reverse VAT charge should apply or not.
Why are these VAT changes being made for CIS businesses?
One of the easiest ways to eliminate subcontractor VAT fraud is to remove the flow of money by taking away the option to collect or charge VAT from clients.
Due to the fact the reverse charge now makes it the duty of the contractor to account for any VAT, there is, therefore, no way for the suppliers, i.e. the subcontractors, to get away with not paying tax to HMRC.
What are the implications for contractors?
Whereas in the past you likely would have paid suppliers for their services with VAT included, these new rules mean that you will now need to pay them exclusive of VAT and record the appropriate amount of VAT that would have been owed under the old rules on your VAT return.
The information required to account for the VAT should be provided on the invoice your subcontractor sends to you, ideally with a reminder that it’s now your obligation to record the VAT using the new reverse charge system.
You account to HMRC for all the reverse charged VAT accumulated during a VAT quarter and pay for it at the same time and in the usual way as you would do for any VAT you have charged under the usual rules.
What are the implications for subcontractors?
When working with subcontractors, you will need to establish whether they are VAT registered.
Once you’ve confirmed that they are VAT registered, and what you are supplying or providing is covered by the new legislation, you should send them a reserve charge invoice at the point of billing along with a brief description stating that the invoice is subject to the new UK reverse VAT rules.
You will no longer receive VAT from customers to pass on to HMRC, and the responsibility for charging and accounting for VAT will fall to the contractor receiving your services.
What action do I need to take?
As these changes come into effect on 1 October 2020, if you’re working in the construction trade as a buyer or supplier, you should make sure that you’re up to date with the new reverse charge VAT rules and find out how they will impact your businesses’ sales and purchases.
As these changes will undoubtedly create more admin for you in the short-term, it’s important to set some time aside to do this.
Regardless of whether or not you’re at the end of the supply chain, as a CIS business, you should make it a priority to inform your contractors and subcontractors about the implications of the new VAT changes as you may be liable for any charges if the VAT is not accounted for properly.
However, there is no need to panic. HMRC have stated that they will overlook any genuine accounting errors for six months after the new reverse charge rules come into play, providing companies are proactive about following them.
Want to find out more?
If you would like any help in deciding if and when these rules apply to your company, then we are here to help. Get in touch with An Accounting Gem Limited on 01473 744 700 or email us on firstname.lastname@example.org to find out more.