In cases where the reverse charge applies, the recipient of the supplies accounts for the VAT, rather than the supplier charging and accounting for the VAT.
In practice, Sheards says, this will mean that where there is a chain of contractors/sub-contractors working on a building project, for instance, none of those entities will add VAT to their invoices, aside from the main contractor who is invoicing the end-user of the property.
In Britain, there are currently 290,3741 registered construction firms with 1,279,000 people employed in the industry. But the sector has faced a number of challenges in recent years, including Brexit and more recently Covid, which meant there were 3,502 insolvencies in the construction sector in 2019, equating to approximately a fifth of all insolvencies.
“The changes are a response to what HMRC have described as significant VAT fraud in the industry, but they do in a way reflect a lack of trust to those operating in the sector from HMRC,” Kevin Winterburn, director at Sheards Accountancy, said.
“The changes could have huge impacts on a company’s cashflow, so it’s essential that construction workers speak to their advisers, traders and suppliers ahead of March 1.”
Businesses in the sector already face major challenges when it comes to cashflow, with a recent survey revealing that one in five construction companies say cashflow is a constant problem. Meanwhile, it’s previously been suggested by separate research that 84% of construction companies have reported problems with cash flow.
Experts predict that the VAT domestic reverse charge coming into play on March 1 2021 could have a further negative impact on the already stretched cashflow situation of many firms in the construction industry.
As a result, Sheards says it’s important for companies to review their existing work pipelines and relationships to prepare for the change.
The chartered accountants have shared their top considerations to prepare for the VAT domestic reverse charge changes.
From a supplier point of view, the legislation change will mean:
You will need to continue to validate sub-contractors for CIS purposes as usual.
You will need to check and validate your CIS services customer’s VAT status.
You will need to check if you have confirmation that your customer is the end-user – keep a record of it.
If the customer isn’t VAT registered – no change to the current process, charge 20% VAT on income.
If the customer is VAT registered but also an end-user – no change to the current process, charge 20% VAT on income.
If the customer is VAT registered but is not an end-user– reverse charge VAT is applied.
From a customer point of view, the legislation change will mean:
You will need to inform your supplier whether or not you are the end-user.
If you are the end-user, you will be charged 20% VAT and you will be able to reclaim it if you are VAT registered.
If you are not the end-user and the invoice is subject to CIS, the supplier’s invoice should be subject to reverse charge and you can’t reclaim any VAT on it.
Review your existing trader relationships
It’s more important than ever to have a clear picture of all the traders and various suppliers you could work with on a project, Sheards insists. Reviewing the various traders you will work with ahead of beginning a project will allow you to identify where the VAT should and should not be.
From March 1 2021, invoices will have to state that the reverse charge is being applied and no output VAT should be charged. The VAT-registered customers will then need to charge themselves VAT and then claim relief in the normal way. They will do this by using the reverse charge tax rate.
Flat rate scheme issues
If you are on the flat rate scheme – you may need to leave before March 1 2021. This should be discussed with your accountant beforehand, Sheards claims.
Review your pipeline
Looking further down the line at work which will begin after March 1 but which might have already been agreed in contracts, these may need to be reviewed in order to reflect the changes. Contracts should clearly state where VAT is being charged and it’s important that any existing contracts are amended to avoid any issues with payment once a job is complete.
Lastly, Sheards advises that projects existing prior to March 1 2021 will need split treatment if they are continuing post-March 1. If you’re unsure of how to do this, speak to your accountant.
“The VAT domestic reverse charge has been a long time coming and it’s something everyone in the industry has been aware of since 2019. But with March 1 quickly approaching, it's important for firms in the construction and property industries to start implementing changes to the way they work to make sure they are covered,” Winterburn added.
“We hope by highlighting the key considerations for everyone in the industry, including suppliers and customers, the changes and responsibilities of each party will be clearer.”
To find out more about the VAT domestic reverse charge, click here.