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HMRC’s new Domestic Reverse Charge for the Construction Sector comes into force from today, 1 March 2021. As you may know from our previous blogs, it was originally planned to come into force in October 2019, until this was pushed back until October 2020 to enable more time for the sector to prepare for the change. Then the pandemic came along and this was extended by a further five months to 1 March 2021. However, this date is now upon us and no further delays have been announced.
Below we summarise the rules, but we note they are far from simple, so please take the time to understand them and ensure you apply them, so you don’t end up paying too little or too much VAT.
What is it and who does it apply to?
The VAT Domestic Reverse Charge for services is a change in how VAT is handled for certain parts of the UK Construction services. The scheme means that those supplying Construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT, thus falling on those with the “widest shoulders”. The customer will effectively both pay and reclaim the VAT at the same time.
In simpler terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC. This will apply to standard VAT rate supplies and reduced VAT rate supplies (e.g., installing energy saving products and certain work for people over 60, converting a building into a house or flats or from one residential use to another, renovating an empty house or flat). It will not apply to zero-rated supplies (e.g., building a new house or flat or work for disabled people in their home).
Subcontractor – What do you need to do?
At the moment you usually add VAT at 20% to your sales invoices, if you are VAT registered. From 1 March 2021, if you issue an invoice to a Contractor in the Construction chain of events you no longer add VAT, you must state on the invoice what the VAT amount or rate should have been and that the invoice falls within Reverse Charge rules e.g. ‘’Reverse Charge: S55 VATA 94 applies’’
You have to consider what services you are supplying and to whom, as you won’t always exclude the VAT, it will depend on the specific transaction.
Contractors – What do you need to do?
Usually your subcontractors will issue you with invoices, with VAT on, if they are VAT registered. However, from 01 March 2021, it is likely that most of them will not have VAT on them, but state Reverse Charge rules apply (see above).
You must enter the invoice as if it has VAT on it, even though it doesn’t. It might sound silly, how can I reclaim the VAT on an invoice when I haven’t paid it? The answer is you cannot. Therefore, at the same time you must enter an equivalent amount of output/sales VAT, so the two VAT amounts cancel down to zero. You must enter VAT only in your accounts i.e. that ultimately reports as output tax in box 1 of the VAT return, DO NOT also enter any figures as sales which report as Box 6 in your VAT return.
This might be a great opportunity for you to use a MTD-compliant software, such as Xero, QuickBooks, FreeAgent or Sage, to make this process as simple as possible for you, if you are not already. Book keeping spreadsheets and bridging software may no longer be the answer.
Key things to consider
- Am I registered for VAT and involved in the Construction industry?;
- Will this invoice I am producing be after 01 March 2021?;
- Is the person I am invoicing a contractor in the Construction Sector? (e.g. if you are completing work for a homeowner or the ultimate property owner, they are not);
- Are the services I am supplying on the list of Reverse Charge services, so the whole invoice has no VAT?;
- Did I put the ‘Reverse Charge: S55 VATA 94 applies’ statement on my invoice, if applicable?;
- Have I received an invoice with this statement? Remember to add VAT and an equivalent amount of sales/output VAT;
- Did I read the detailed rules, in case there is something in there that impacts on me?; and
- Is my bookkeeping package (or MTD-compliant software) capable of coping with this new change?
More information
This is only a very simple summary of the new rules. The full HMRC guidance can be found here, if you are so inclined. There are also free HMRC webinars to assist you with this and more are likely to follow soon.
Black and White Accounting
This will be a big change for a lot of individuals and businesses in the Construction Sector. We have a specialist team with expertise in this area who are keen to help you here. You can get in touch with them today by contacting Black and White Chartered Certified Accountants, populating the “Got a Question” form on the right, or calling us on 0800 140 4644.
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