How Will VAT Reverse Effect Construction?

HMRC’s new VAT domestic reverse charge for building and construction services comes into effect from today, 1st March 2021. With this in mind, Kevin Winterburn, director at Chartered Accountancy practice Sheards Accountancy delves into the impact the legislation will have on both the construction and property industries.

The reverse charge will apply to all CIS registered businesses buying and selling construction services that are subject to CIS reporting, apart from those that are zero-rated, up to the point in the supply chain where the customer is the end-user. At this point, the normal reporting and collection of VAT resumes.

Where the reverse charge applies, rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT. In practice, this will mean that where there is a chain of contractors/subcontractors working on a building project, for example, none of those entities will add VAT to their invoices, other than the main contractor who is invoicing the end-user of the property.

Currently, in Great Britain, there are 290,374¹ registered construction firms with 1,279,000 people employed in the industry. The construction sector has a monthly output of £14,014 million² with an average weekly earning in the industry of £648¹. But the industry has faced a number of challenges in recent years, which saw 3,502 insolvencies¹ in the construction sector in 2019, equating to around a fifth of all insolvencies.

Kevin commented: “The changes are a response to what HMRC have described as significant VAT fraud in the industry but they do in a way reflect a lack of trust to those operating in the sector from HMRC. The changes could have huge impacts on a company’s cash flow, so it’s essential that construction workers speak to their advisors, traders and suppliers ahead of 1st March.”

One of the biggest challenges for businesses in the sector is cash flow and a recent survey revealed that 1 in 5³ construction companies say cash flow is a constant problem, with 84%⁴ of construction companies reporting that they had problems with cash flow. When the VAT domestic reverse charge comes into play on the 1st March 2021, experts predict this could have a negative impact on the already stretched cash flow issues in the construction industry, so it’s important for firms to review their existing work pipelines and relationships to prepare for the change.

Kevin shares his top considerations to prepare for the VAT domestic reverse charge changes:

1. From a supplier point of view the legislation change will mean:

• You will need to continue to validate sub-contractors for CIS purposes as usual
• You will need to check and validate your CIS services customer’s VAT status
• You will need to check if you have confirmation that your customer is the end-user – keep a record of it
• If the customer isn’t VAT registered – no change to the current process, charge 20% VAT on income
• If the customer is VAT registered but also an end-user – no change to the current process, charge 20% VAT on income
• If the customer is VAT registered but is not an end-user– reverse charge VAT is applied

2. From a customer point of view, the legislation change will mean:

• You will need to inform your supplier whether or not you are the end-user
• If you are the end-user, you will be charged 20% VAT and you will be able to reclaim it if you are VAT registered
• If you are not the end-user and the invoice is subject to CIS, the supplier’s invoice should be subject to reverse charge and you can’t reclaim any VAT on it

1. Review your existing trader relationships. It’s more important than ever to have a clear picture of all the traders and various suppliers you could work with on a project. Reviewing the various traders you will work with ahead of beginning a project will allow you to identify where the VAT should and should not be.
2. From the 1st March 2021, invoices will have to state that the reverse charge is being applied and no output VAT should be charged. The VAT-registered customers will then need to charge themselves VAT and then claim relief in the normal way. They will do this by using the reverse charge tax rate.
3. If you are on the flat rate scheme – you may need to leave before 1st March 2021. This should be discussed with your accountant beforehand.
4. Looking further down the line at work which will begin after the 1st March but which might have already been agreed in contracts, these may need to be reviewed in order to reflect the changes. Contracts should clearly state where VAT is being charged and it’s important that any existing contracts are amended to avoid any issues with payment once a job is complete.
5. Projects existing prior to 1st of March will need split treatment if they are continuing post 1st of March. If you’re unsure of how to do this, speak to your accountant.

Kevin summarises: “The VAT domestic reverse charge has been a long time coming and it’s something everyone in the industry has been aware of since 2019. But with the 1st March quickly approaching, it’s important for firms in the construction and property industries to start implementing changes to the way they work to make sure they are covered.

“We hope by highlighting the key considerations for everyone in the industry, including suppliers and customers, the changes and responsibilities of each party will be clearer.”

To find out more about the VAT domestic reverse charge please visit: https://www.sheards.co.uk/news/sheards-blog/archive/article/2021/January/vat-domestic-reverse-charge-for-building-and-construction-services

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