On March 1st 2021 HMRC introduced the VAT domestic reverse charge. It was initially planned to start in October 2019 but was postponed due to Brexit. However due to the coronavirus outbreak HMRC postponed its earmarked date of October 2020 and pushed its release back to March 2021.
What is the VAT domestic reverse charge?
It is a change in how VAT is handled for certain kinds of construction services and the building and construction materials used in those services.
It is seen as an extension of the Construction Industry Scheme (CIS) and applies to transactions which are eligible to be reported under the CI scheme and only between VAT-registered contractors and sub-contractors.
Effectively in means those supplying construction services to a VAT registered customer are no longer having to account for the VAT.
What does it mean for the construction industry?
The service is being introduced by HMRC to combat fraud. Shifting the VAT charge down the supply chain, HMRC has made it its intention to make this type of fraud impossible.
It applies to standard and reduced-rate VAT supplies, but not to zero-rated supplies.
It applies only to VAT-registered businesses who are supplying or receiving services that are reported in the CI scheme.
What provisions do contractors and sub-contractors need to make?
If your business is CIS registered and is the recipient of services, and received an invoice with the reverse charge applied, then you account for the VAT value as part of your overall input tax. It is as if you have charged it to yourself.
If your business is not VAT registered, then the reverse charge can’t be applied to you and standard VAT rules apply.
It is vital to tell your suppliers in writing that you are not VAT registered to avoid any issues.
HMRC says the VAT reverse charge for construction doesn’t apply to sub-contractors unless the following questions are answered yes.
Are any of the supplies you are making within the scope of the CIS?
Is your customer VAT registered?
Will the payment be reported under CIS?
Is the supply standard or reduced rate?
Are you positive that the customer is not an end-user?
How will it impact my cashflow?
Sub-contractors - The new scheme may affect your cash flow as HMRC may determine you as a repayment trader as you no longer pay VAT on your sales. A repayment trader is classed by HMRC as a business whose VAT return means they claim money from HMRC rather than making a payment.
This could impact the payments you receive from HMRC which could affect your cashflow.
Contractors – You need to ensure that you correctly account for reverse change VAT invoices when you receive them.
Any VAT due directly to HMRC you need to pay as part of your normal VAT process, instead of paying the VAT on CIS related supplies to your supplier. It is imperative that you make sure that the invoice you receive is correct otherwise you could end up paying too much or too little VAT.
As with all thing’s preparation is key. Whilst the system beds in and you and your suppliers get used to the new ways of charging it may be worthwhile considering having a revolving credit facility which gives you flexibility and access to cash which can cover your incoming VAT liabilities.
Just Cashflow provide funding which could give your business the security and confidence to cover your HMRC liabilities.