New VAT rules for the construction industry: Are you ready?

New VAT rules for the construction industry will finally come into effect on March 1 so it’s important those affected start getting ready.

The ‘domestic reverse charge’ means the UK customer who gets supplies of construction services must account for the VAT due on these supplies on their VAT return, rather than the UK supplier.

Businesses will need to adapt their accounting systems for dealing with VAT and there will be a negative impact on the cash-flows for many of those affected, as they will no longer get VAT payments from customers for services where the reverse charge applies.

The taxman says the change will remove “the scope for fraudsters to steal the VAT due”. The new reverse charge will apply to a wide range of services in the building trade.

The government delayed the implementation of these VAT changes for a second time last year, to help businesses overcome the effects of the coronavirus pandemic but now the clock is ticking to March 1.

The changes only apply to supplies of building or construction services made to or received by businesses registered for UK VAT, where such a supply must be reported through the Construction Industry Scheme (CIS). It will not apply to consumers or businesses customers not meeting the reporting criteria.

GETTING PREPARED

It is important to make sure your accounting systems and software can deal with the changes. You should also consider whether this will affect your cash flow and make sure staff responsible for VAT accounting are familiar with the reverse charge and how it will work.

WHO DOES THE REVERSE CHARGE APPLY TO?

Typically, it will affect sub-contractors supplying their services to other contractors in the construction industry.

Although the provisions apply principally to services in the construction sector, they cover all supplies of labour and materials in a single contract or transaction.

The reverse charge also applies to services provided by labour only sub-contractors as they are responsible for the works carried out. However, it is not intended to apply where a contractor works directly for an ‘end user’.

WHAT IS AN END USER?

These are consumers and businesses, or groups of businesses, that are VAT and CIS registered but do not make onward supplies of the building and construction services supplied to them, namely those who have an interest in the land where the work is being undertaken.

Intermediary suppliers are also exempt from the reverse charge. These are VAT and CIS registered business in a corporate group with an end user. If they buy construction services and supply them to an end user in the same group, they are all treated as if they are an end user.

End users and intermediary suppliers both need to notify the contractor of that fact.

Supplies by employment businesses, also known as labour agencies, are also not subject to the reverse charge. Agencies supplying construction workers are, for VAT purposes, treated as supplying staff rather than building and construction services.

WHAT SUPPLIERS NEED TO KNOW

You must use the reverse charge from March 1 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

You need to:

• 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. Use the government’s flowchart to assist you –
https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#changes-to-cash-flow-and-monthly-returns)

• 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
• Make sure that a narrative appears on the invoice instructing the customer to declare the VAT on their VAT return – see link below:

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#invoices

• 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

WHAT CUSTOMERS NEED TO KNOW

You must account for the reverse charge from March 1, 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

You need to:

• 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. Use the government’s flowchart to assist you – https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#changes-to-cash-flow-and-monthly-returns
• Make arrangements to account on your VAT returns for the VAT identified as due to HMRC on your suppliers’ invoices
• Make sure that 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

To discuss any issues raised in this article and to get advice on making sure you are prepared for the changes please contact WNJ on 01772 430000