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VAT rule changes affecting some CIS contractors are due March 2021

Arif Patel

Arif Patel | Accountancy & Tax Service Director

Tuesday 22nd Dec, 2020

Changes to the VAT rules coming in on 1 March 2021 may affect Construction Industry Scheme (CIS) contractors and other businesses in the building and construction sector.

In this article we try to answer a few of the questions being widely asked by those involved in the industry.

What is the VAT reverse charge?

It is effectively an extension of the CIS scheme and is a different way of handling VAT for certain types of construction services and the building and construction materials supplied with them.

The proposed changes mean 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. In other words, it will be considered as input tax for them, as if they had made the supply to themselves.

To whom does the reverse charge apply?

The important thing to remember is that the new rules apply if you:

  • Are registered for VAT
  • Provide supplies of building & construction services if they are within the scope of the CIS

How does the reverse charge affect sub-contractors?

For the services they provide, sub-contractors who are VAT registered, the new rules require the main contractor engaging them, to account for and pay the VAT directly to HMRC.

From what date does the charge apply?

The rules come into effect on 1 March 2021 but their application will depend on the date of issue of the VAT invoice or the receipt of payment, whichever comes first. The normal ‘Time of Supply’ rules apply.

If the tax point is on or after 1 March 2021, then the reverse charge should be applied. If it’s before that date, the current rules apply.

Does the reverse charge apply to all the different rates of VAT?

The reverse charge applies to both standard and reduced-rated supplies but not zero-rated supplies.

Why have the rules been changed?

HMRC say it will help combat fraud carried out by individuals and businesses who charge VAT for their supplies but disappear without paying their VAT bills.

Moving the VAT charge down the supply chain makes this kind of fraud more difficult to carry out. Similar rules have already been successfully introduced in other sectors including mobile phone and computer chip retailers as well as wholesale energy supplies.

How do I deal with the VAT reverse charge work for the construction services my business has received?

It should be understood that only VAT registered businesses who are supplying or receiving services that are reported under the Construction Industry Scheme are affected.

As a VAT registered, CIS business, and as a recipient of construction services if you receive an invoice with the reverse charge applied, then you need to account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.

Does the VAT reverse charge apply to me as a sub-contractor?

According to HMRC the reverse charge does not apply unless you answer YES to all of these questions for each transaction:

  1. Are any of the supplies you are making within the scope of the CIS?
  2. Is the supply standard or reduced-rated?
  3. Is your customer VAT registered?
  4. Will your payment be reported under the CIS?
  5. Are you sure the customer is not an end-user?

What construction services does the reverse charge apply to?

HMRC provide a a list and detailed explanation here:

Remember that the reverse charge applies to the services outlined in HMRC’s guidance plus any construction materials directly used with those services. This is different from the CIS scheme which does not cover materials.

As a supplier of construction services will I see any real differences to my business invoicing and accounting?

It’s unlikely because when you issue your VAT invoice you would merely be passing on the VAT charge you would have accounted for in any event.

Probably the most noticeable change may be in your cashflow because the VAT you previously held before passing it on monthly or quarterly to HMRC will not be available.

You may become a ‘repayment trader’ because you no longer pay VAT on your sales. You may find yourself reclaiming money from HMRC rather than paying it over to them.

If my business provides construction services to domestic users does the VAT reverse charge still apply?

No, it only applies to VAT registered businesses also registered for the CIS. If the services are provided for ordinary non-business individuals, then normal standard VAT rules apply.

What if I get things wrong? Is there any leeway for possible errors or mistakes when the new rules are applied?

HMRC have indicated that they will apply a ‘light touch’ for the first 6 months after the introduction of the arrangements. However, it is recommended that you take advice from your accountant or HMRC if you are in any doubt over aspects of the new rules.

My business is on the VAT flat-rate scheme. Will I be affected?

Reverse charge supplies are excluded from the Flat Rate Scheme (FRS) and are reported in the same way as transactions under the standard scheme.

This will reduce the amount of turnover that is used as a basis for reclaiming VAT under the FRS. Sub-contractors may want to discuss this with their accountant as it may be more beneficial to revert to the normal standard rate VAT scheme.

Does the VAT reverse charge apply for suppliers of construction staff?

If a business supplies temporary workers and is responsible for paying them then it is not subject to the VAT reverse charge.

The reason is that the supply of staff by an employment agency etc is not considered as being a construction service for VAT, and the individual workers are paid not by the construction business that uses them to deliver construction services.

Although the new rules come into effect in March 2021 we recommend that, if you think you are likely to be affected, you try to become familiar with the new rules in plenty of time. The rules are complicated and likely to impact on many in the building and construction industry.

If you are having difficulty in interpreting them or understanding what changes you may need to make to your business and its accounting systems, please don’t hesitate to contact PayStream

If you're one of ur existing CIS contractors, please contact customer care if you'd like to discuss this in more detail.

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