Construction Sector – New VAT Rules 1st March 2021
Notwithstanding COVID-19, the proposed new VAT rules affecting the construction sector are due to take effect from 1st March 2021.
HMRC still plans to apply the new rules, which are called “the domestic reverse charge for supplies of building and construction services” (reverse charge scheme).
The new system of VAT accounting will affect all sub-contractors supplying services to other contractors in the construction sector, over a wide range of services in the building trade, mostly those covered by the CIS payment rules. Fortunately, these rules do not affect invoicing to domestic customers and other “end users” defined in the regulations.
Under the new rules, supplies of standard rated (20%) or reduced rated (5%) building services between VAT registered businesses in the supply chain will not be invoiced in the normal fashion. From 1st March, the sub-contractor will not charge VAT on their invoice to the contractor, and will be paid therefore only the net value of work done, without the VAT.
The contractor receiving supplies will be required to enter the VAT identified on their sub-contractor invoices within box one of their VAT return and to claim this back on box four of the same return. The intention is to ensure VAT is correctly accounted for on supplies by sub-contractors, to avoid fraudulent businesses not paying to HMRC the VAT charged to contractors.
Who is caught?
Sub-contractors supplying services to other contractors on either a supply and fit, or labour-only basis (excluding labour agencies). The reverse charge scheme applies if services are:
- Standard rated or reduced rated; and
- Within the scope of CIS.
Unlike the CIS, the reverse charge scheme also includes materials, if supplied with the services.
Accounting systems and software will need to be checked to ensure they can deal with the reverse charge system. All personnel responsible for invoicing and accounting will need to be familiar with the reverse charge scheme. Cashflow may be impacted by the arrangement for subcontractors who will no longer collect VAT from contractors before paying this to HMRC.
Businesses (subcontractors) who will be due regular VAT repayments as a result of the reverse charge scheme may wish to consider switching to monthly VAT returns to improve cash flow.
In summary, you must use the reverse charge scheme from 1st March 2021 if you are VAT registered in the UK supplying building and construction industry services and:
- Your customer or supplier is registered for VAT in the UK;
- Payment for the supply is reported within CIS;
- The services supplied to/by you are standard or reduced rated;
- You/your supplier are not a business supplying either staff or workers or both; and
- Your customer/you have not given written confirmation that they are an end user or intermediary supplier (in a group with the expected end user, or who has an interest in land and buildings with the expected end user).
Please contact your Barnes Roffe liaison partner if you have any concerns about the operation of this scheme, the capability of your software or personnel to deal with it, or indeed the potential cashflow impact that may arise from operation of the scheme.
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PLEASE NOTE: By the very nature of this type of information the details of tax law might have changed since they were published, so contact your Barnes Roffe partner before acting on any matter contained in these documents.