In less than three weeks’ time, on 1 March 2021, reverse charge VAT is due to apply in the construction sector. There is, however, the possibility of a third delay as the country grapples to get on top of COVID-19.
This significant change, which affects VAT-registered businesses operating under the construction industry scheme (CIS), was initially due to come in on 1 October 2019. Brexit talks with the EU resulted in a 12-month delay.
That meant it was set to kick in on 1 October 2020, only for a second wave of COVID-19 cases in the UK to push the implementation date back by a further six months to 1 March 2021.
Time will tell if the Treasury announces another last-minute delay, but this tax change is not going away and getting your house in order now will not be a waste of a time.
What is the reverse charge?
Dealing with a lot of clients in the construction industry, we are all too aware of the suspicion surrounding unpaid VAT in this sector. That’s essentially what reverse charge VAT aims to crack down on, specifically where VAT is charged and not paid to HMRC.
Currently, VAT-registered subcontractors charge the main contractor VAT for CIS-qualifying services they supply. From 1 March 2021 these obligations will reverse, so the main contractor will need to collect the VAT from the subcontractor who supplies qualifying construction services and then pay the VAT to HMRC.
The reverse charge applies to standard and reduced-rate supplies of specific building services made to VAT-registered businesses, which in turn make onward supplies of those services. Zero-rated supplies of construction services are exempt.
Who does it affect most?
Cashflow disruption is the most obvious threat to VAT-registered subcontractors operating under the CIS. They are used to charging VAT of up to 20% and holding onto this until it’s time to pay their VAT bill.
This often involves large amounts of money. For example, if a subcontractor was to invoice for £120,000 (£100,000 + VAT @ 20%) on 1 January 2021, they would only be able to invoice for £100,000 on 3 March 2021 – assuming the reverse charge comes in on 1 March 2021. As such, the VAT previously paid with the invoice and held before paying the monthly or quarterly VAT bill to HMRC will no longer be received.
Not all construction services will be affected by this tax change, while landlords and property developers are exempt.
We can help you prepare
If your firm is VAT-registered and operates under the CIS, you can come to us to update your accounting software to ensure it can deal with the reverse charge. We can also assess the potential cashflow impacts or our specialist VAT service can simply handle returns on your behalf.
Contact us on 01454 619900 or email firstname.lastname@example.org for help preparing for reverse charge VAT in the construction industry.