Although delayed by several months, the domestic VAT Reverse Charge for construction is on course to be introduced and businesses need to prepare now.
The rules, which come into force on 1 March 2021, will apply to all businesses registered for VAT that are in the construction sector, irrespective of size.
A domestic reverse charge means the UK customer who receives supplies of construction services must account for the VAT due on these supplies on their VAT return, as opposed to the UK supplier doing so. This follows similar measures introduced in other sectors, and is an attempt to remove the scope for VAT fraudsters.
The domestic reverse charge for building and construction services was originally planned to come into force on 1 October 2019, but was delayed by a year in response to industry concerns that some businesses were not ready to implement the changes required. It was delayed then for a second time, but all is on course for the 1 March 2021 introduction
Businesses need to adapt their accounting systems for dealing with VAT and there will potentially be a negative impact on the cashflows for many affected businesses, primarily as they will no longer get VAT payments from customers for services where the reverse charge applies.
You should prepare for the 1 March 2021 introduction date by:
If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if so.
If you’re a sub-contractor you’ll also need to contact your customers seeking confirmation over whether the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.
A key concern with the new start date is that it is very close to 31 March 2021, which is the deadline set for paying the VAT arrears. Any VAT deferred during the VAT payment holiday between 20 March and 30 June 2020 due to the pandemic is then fully due by 31 March 2021. This creates potential cash flow issues.
However, it is possible to come to an arrangement with HRMC to opt for smaller payments, extended over a year to 31 March 2022. Be aware, though, that delayed payments will not currently incur interest but this may change and there is still the option to settle by 31 March 2021.
If all or most of your income will be subject to the reverse charge, you will be VAT repayment traders – with input tax to claim on materials and overheads but very little or no output tax to pay.
In that case it makes sense to submit monthly rather than quarterly VAT returns after 1 March 2021, to accelerate input tax recovery, assuming the amounts to claim are worthwhile.
Another action point for builders is to leave the flat rate scheme. It will also make sense to leave the cash accounting scheme in many cases, so that input tax can be claimed on the date the purchase invoice is received from suppliers instead of the payment date. If you are continuing other supplies the cash accounting scheme can still work for you.
It’s clear that the introduction of the domestic VAT reverse charge for construction has significant implications for anyone in the building trade, and starting early – i.e. now – to get to grips with the system is highly advisable.
For help and advice with the new VAT reverse charge, or any support with tax and accounting, please get in touch with the team at Optimum.