New Vat Rules For Construction Sector Start On 1 March 2021

New VAT rules are finally due to come into effect this March which will impact on accounting for VAT for transactions in the construction sector. These new rules, which were originally scheduled to start back in October 2019, have already been delayed twice as there was a lack of awareness of the changes in the industry.

The new “reverse charge” system of VAT accounting will affect sub- contractors supplying their services to main contractors in the construction sector.

Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the new reverse charge system, the sub-contractor will not show VAT on their invoice to the main contractor and will not account for output VAT.

This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors, some of whom were allegedly not paying over the VAT charged to HMRC.

The new reverse charge will apply to a wide range of services in the building trade, primarily those activities covered by the construction industry (CIS) payment rules. Note that normal VAT invoices will continue to be issued to domestic customers.

UPDATE:

Invoices and other VAT documents

When supplying a service subject to the domestic reverse charge, suppliers must:

• show all the information required on a VAT invoice

• make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT

• clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer

The VAT regulations 1995 say invoices for services subject to the reverse charge must include the reference ‘reverse charge’. Here are some examples of wording that meet the legal requirement:

• reverse charge: VAT Act 1994 Section 55A applies

• reverse charge: S55A VATA 94 applies

• reverse charge: Customer to pay the VAT to HMRC

Invoice example (PDF, 98.2KB, 1 page)

If your accounting software cannot show the reverse charge

If your software cannot show the amount of VAT to account for under reverse charge, you must:

• state that the VAT is to be accounted by the customer

• add wording to the invoice to say ‘customer to account to HMRC’ for the reverse charge

• make sure customer can identify reverse charge goods or services

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#invoices

See here for HMRC’s full technical guide

Flowcharts (https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#flowcharts)

If you sell building and construction services

Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:

• your customer is registered for VAT in the UK

• payment for the supply is reported within the Construction Industry Scheme (CIS)

• the services you supply are standard or reduced rated

• you’re not an employment business supplying either staff or workers, or both

• your customer has not given written confirmation that they’re an end user or intermediary supplier

Suppliers flowchart (PDF, 149KB, 1 page)

If you buy building and construction services

Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:

• payment for the supply is reported within the Construction Industry Scheme (CIS)

• the supply is standard or reduced rated

• are not hiring either staff or workers, or both

• you’re not using the end user or intermediary exclusions

Buyers flowchart (PDF, 139KB, 2 pages)

Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system when it starts. If you are a sub-contractor using the VAT flat rate scheme, it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses from 1 March 2021.

The Rawcliffe & Co team is available via phone or email Monday to Thursday 9-5pm and 9 – 4:30pm on Fridays.

Tel: 01253 798812
Email: info@rawcliffeco.com