Reverse charges have been around for a while, but they will soon be applied in a variety of new and different ways. From the 1st March 2021, businesses in the construction industry may find they have to deal with VAT differently. Here’s everything you need to know.
What Is A VAT Reverse Charge?
When a VAT reverse charge is applied to goods or services, it means that the responsibility for paying VAT is moved from the supplier to the customer. The aim of doing this is to reduce fraud. The government uses this technique to stop suppliers from pocketing the VAT charges themselves. As such, you can consider this new policy an extension of the Construction Industry Scheme (CIS).
It is important to note that a VAT reverse charge can only be applied when the customer is VAT registered.
When Do The Changes Take Effect?
The changes come into force on 1st March 2021. This has already been pushed back to give companies time to prepare and allow for the disruption caused by the Coronavirus.
If you are worried about jobs that might straddle this date, then the critical thing to consider is your invoice’s timing. If the invoice is issued before 1st March, the old VAT rules apply. Any invoices issued on or after 1st March will need to comply with the new regulations.
What Does The VAT Reverse Charge Apply To?
The new reverse VAT charge will apply to both standard and reduced-rate VAT supplies. However, it will not affect zero-rated supplies.
Which Customers Does It Apply To?
A VAT reverse charge is only applicable if your customer is a VAT-registered business. It also only applies if the services are reported under CIS.
What Services Are Affected?
A wide range of services is included in the new regulations. Broadly speaking, it affects the following categories of work:
- Construction, alteration, repair, or demolition of and buildings or structures
- Installation of any utilities to a building, including ventilation, air conditioning, lighting, heating, and fire protection systems
- Cleaning of structures and building if related to a construction project
- Painting and decorating
- Any other services necessary for completing the jobs listed above, including landscaping, scaffolding, and site clearance.
Several services are exempt from the new charging system. Some of which include:
- Installation of security systems and public address systems
- Installation of blinds and shutters or seating
- Work carried out by architects, surveyors, building engineers, consultants
- Manufacturing and delivery of building materials
- Drilling or mining works.
If the services you provide fall into both categories, then you should apply the reverse VAT charge to all the items on your invoice. The aim of this is to keep things as simple as possible.
Do The Changes Affect Subcontractors?
HMRC has tried to keep things as simple as possible. In most cases, VAT reverse charges will not apply to subcontractors. The only time this is not true, will be if all the following apply:
- Supplies and services are within the scope of CIS
- All items and services are at standard or reduced-rate
- The customer is VAT registered
- The payment will be reported under CIS
- The customer is not an end-user
What Impact Will This Have On My Business?
There are a few ways that this will impact businesses;
- It can affect cash flow
- You may need to review your contracts
- There may be an increased administrative burden.
If you currently rely on the extra cash you receive from VAT charges to keep things flowing through the tax year, you will need to make plans to address this. You may be eligible to make VAT repayment claims. In some cases, it may be beneficial to move to a monthly returns routine.
You will need to find ways to collect the extra required information from your customers. With this, you can ascertain, which VAT payment method is required. Then you will need to inform them if the duty to pay lies with them. You will also need to keep records of which customers will be responsible for the VAT instead of you.
Do Invoices Need To Change?
You will need to make sure that any invoices given to customers responsible for paying the VAT reverse charge are correct and up to date. The invoice needs to clarify that the customer is responsible for paying the VAT, and exactly how much that will be. Acceptable references include:
- reverse charge: VAT Act 1994 Section 55A applies
- reverse charge: S55A VATA 94 applies
- reverse charge: Customer to pay the VAT to HMRC
If you already use Workever to collect customer information and issue invoices, this is being taken care of. We are upgrading our software to allow you to collect the necessary information to determine which VAT rules apply, and our invoices will be compliant with the requirements from HMRC.
If you’re new to Workever, rest assured that we do all we can to make running your business as straightforward as possible. We will continually update our app in line with what your business needs and the relevant compliance information.