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HMRC have announced that the implementation of the VAT Domestic Reverse charge for CIS Construction services is to be postponed for a second time to 1 March 2021.

From the date of introduction, Supplies between sub-contractors and contractors as defined by CIS will be subject to the reverse charge unless they are supplied to a contractor who is an end user. 

This measure will mean that the customers will be liable to account for the VAT in respect of those purchases, rather than the supplier.

How to prepare for those in the Construction Industry?

Identify potential cashflow issues and take proactive measures to protect the business

We anticipate that the reverse charge will impact small and micro-businesses with a loss of cash flow where VAT will no longer be charged. Also, any businesses who are under the Flat Rate Scheme (FRS) are very likely to be affected by an increase in VAT costs. 

As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment).

Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.

Look at ways to implement a new system of invoicing requirements from 1 March 2021 

From 1 March 2021 the suppliers will be required to change the way they invoice in order to account for the reverse charge. 

Any supplier will be required to issue an invoice stating the fact that its services are subject to the Reverse Charge. The recipient of the invoice must account for the VAT on that supply via their VAT Return at the appropriate rate, this will be instead of paying the VAT to the supplier. HMRC guidance states that an invoice should clearly show the amount of VAT due under the Reverse Charge, however should not be included in the amount shown as a total.

Make sure your accounting systems and software are updated to deal with the reverse charge

You will need to ensure that your accounting systems and those that use them are familiar with the transactions relating to both the purchases and expenses relating to the reverse charge mechanism. It is important to note that any goods supplied in conjunction with any service supplied will also fall within the scope of the Reverse Charge.

Get the Tax point right

For invoices issued for specified 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

Check your clients VAT status

Before raising an invoice, checks must be carried out to ensure your building contractor clients are properly VAT registered and ‘bona fide’.

For transactions that fall within the scheme:

  • No VAT is added to the sales figure invoiced to the contractor. The supplier and recipient are landlord and tenant
  • The invoice has to mention the ‘reverse charge’ applies and must specify the VAT that the onward customer must process in their return.
  • The amount of VAT due should be clearly shown on the invoice but should not be included in the amount shown as total VAT charged.
  • If you receive an invoice for payment that mentions the reverse charge, the output tax must be accounted for as VAT due on sales and reclaimed as VAT reclaimed on purchases.

Notify your subcontractors, contractors and identify your ”end-users”

Therefore, it is important that suppliers ensure that they identify customers who will be liable for the reverse charge by checking VAT registration numbers and obtaining ‘end-user’ evidence to ensure that VAT is accounted for correctly. 

Be aware of the exemptions

The exceptions to any services that will not fall into the scope of the Reverse Charge are:

  • If the supplies made are zero-rated
  • Services supplied to an ‘end-user’ e.g. your customer is selling a newly completed building, rather than selling services on as part of their business operation which is providing building or construction services
  • The services supplied are then onward supplied to a connected company

Therefore, it is very important to consider the affects that the introduction of the Reverse Charge will have on your business.

If you believe that your business will be affected with the introduction of the new Reverse Charge for Construction and require further information, please do not hesitate contact our tax team.