One of the biggest changes to ever affect the construction industry is now only 10 days away. With a view of tackling fraud in construction industry supply chains, the Government is introducing a domestic reverse charge to prevent VAT losses continuing to occur.
So what does this mean?
Historically it has been the supplier that accounts for any VAT due on certain supplies of construction services, however, the new rules change this and could have a substantial impact on Cash Flow and Administration. It will now be mandatory for the customer, rather than the supplier, that will be required to account for any VAT due from 1 March 2021.
The impact on cash flow should not be underestimated and could be significant for traders working in the Construction Industry currently submitting VAT returns quarterly.
As a result of the reverse charge, some businesses may find that, as they will no longer be in receipt of the VAT payment, which may currently be used to temporarily improve cash flow, they will need to find another way to inject cash into their business as a way to finance working capital.
Businesses which receive services from another contractor will need to confirm which VAT rate applies (0%, 5% or 20%) and whether the services received will be subject to reverse charge. Businesses issuing invoices for services liable to the reverse charge will need to ensure that the invoice contains all of the relevant invoicing requirements including a statement that the customer is required to account for VAT under the reverse charge.
So what does the Domestic Reverse Charge cover?
The reverse charge will affect supplies of building and construction services supplied at the standard (20%), or reduced rate (5%), that also need to be reported under the Construction Industry Scheme (CIS).
This is very wide ranging and would cover the following:
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures
- Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Painting or decorating
- Services integral to any of the above
For a period of six months HMRC have confirmed a “light touch” in dealing with any errors that occur if it is satisfied that the business is trying to comply. However, if they consider that the businesses knowingly incorrectly claim end user status, it will be liable for the output VAT that should have been accounted for and it could be liable to penalties.
Actions to take now:
- Check whether the reverse charge affects either your sales, purchases or both
- Contact your regular clients or suppliers to let them know
- Make sure your accounting systems and software are updated to deal with the reverse charge
- Consider whether the change will have an impact on your cash flow