The UK Government have introduced changes to existing VAT rules in order to tackle the increase in fraud. The changes are set to impact the cash flow of over 100,000 UK businesses in the construction sector. Many businesses covered by the Construction Industry Scheme (CIS) now have to ensure they know about the new domestic reverse charge to prevent cash flow problems arising. Read our blog for more information.
What is the CIS Reverse VAT Charge?
The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors.
The reverse charge is the amount of VAT you would have paid on that service if you had bought it in the UK. You have to add that amount to the total of VAT you are going to pay to HMRC that quarter, but also to the amount of VAT you are going to reclaim in that quarter.
When is this implemented and why?
From 1 March 2021, for impacted suppliers, their subcontractors will need to issue domestic reverse charge VAT invoices to main contractors.
The reverse charge scheme has changed the liability for accounting for VAT from the supplier to the customer to reduce the amount of fraud. Suppliers will no longer be required to charge or receive VAT from their main contractor customers.
To ensure the HMRC receive the VAT amounts due, suppliers will no longer charge or receive VAT from the main contractors, but instead, main contractors will effectively charge themselves VAT. Main contractors will charge themselves VAT on subcontractors’ services and then pay the VAT sums that would have been paid to the subcontractor direct to HMRC in their VAT returns. The UK Government believe that this will reduce the number of unpaid VAT to the HMRC; estimated to be millions of pounds a year!
What will the CIS Reverse VAT charge apply to?
CIS registered individuals and businesses registered for VAT in the UK, which sell to other VAT-registered businesses will be applicable for the CIS Reverse VAT Charge.
Services that CIS registered businesses would need to apply the Reverse VAT charge when:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
The arrangements do not apply to businesses providing other support services such as surveying, architecture and consultancy; machinery, drilling or extraction, and the installation of security systems.
The HMRC covers a full breakdown of services are that are and are not included in the Reverse VAT Charge. You can read more here.
If the VAT reverse charge does not apply you should follow the normal VAT guidelines.
How do you prepare the Reverse VAT Charge?
In preparation for the Reverse VAT Charge make sure your accounting systems and software can deal with the reverse charge. All Surrey Accountancy Limited systems can deal with the changes so please do contact us if you need advice on your current system set up.
You also need to consider the impact on your cashflow. Many businesses used the money saved for VAT as readily available interim cashflow; which will no longer be available under the new VAT initiative.
A key factor is to make sure that you and your team are familiar with the changes in VAT and how it will impact on your business. Surrey Accountancy Limited are on hand to train, consult and advise on all aspects of the CIS Reverse VAT Charge.
Do you need more information?
As well as contacting us for more information, the Government have produced lots of information and guides on exactly what the charge means and how it will impact on businesses. You can find out more here.
Similarly, there are flowcharts available to help you decide if you need to use the reverse VAT charge. There are two separate flowcharts available depending on if you sell building and construction services, or if you buy building and construction services. Find your flowchart here.