Posted: 19, January 2021 by Amy Richardson
Construction Industry Domestic Reverse Charge- Important Information
As you may be aware there is a major change to the VAT scheme for the Construction Industry which HMRC are imposing. From 1st March 2021 (deferred from 1st October) this Domestic Reverse Charge will come into effect. Businesses that provide construction services in a business-to-business context (only CIS businesses), where the recipient is not the final consumer, must not account to HMRC for VAT on their supply.
This represents a potentially significant financial and administrative burden, as businesses must adapt their accounting systems to process reverse charge supplies and to make ongoing checks to ensure supplies and purchases are correctly treated.
HMRC have also noted that the charge may reduce the cash flow available to some business, as they will no longer be able to use the VAT collected from customers as working capital before it is paid to HMRC.
Further, as liability now falls to the recipient (your contractor), any debt action pursued by HMRC will be enforced against the recipient instead of you the supplier.
Recipients who breach the new rules could be subject to various penalties, introducing an extra level of risk for suppliers.
It is likely that when working as a subcontractor, the new domestic reverse charge rules will apply to all the applications for payment or invoices that you raise.
An example of how this would work for works undertaken and invoices raised after 1st March 2021 is shown below; Example - Works undertaken of £1,000 standard rated work.
- You will invoice for £1,000 showing your supply as standard rated to which the domestic reverse charge applies but not add the £200 VAT to the amount due.
- You will be paid £1,000 (not £1,200 as would happen currently).
- Because you have not been paid £200 VAT by your contractors, you will not owe HMRC £200 VAT.
Transitional Period Invoices dated up till 28th February 2021 will have VAT applied to them and can be paid with VAT. Invoices dated on 1st March 2021 and after will not show VAT in the amount payable column.
The Government will soon have a dedicated reverse charge website where there will be more information.
This information is intended only to warn you of the change and allow you to make your own preparations. We hope you find it helpful.
It is important that you know and understand the changes and plan for them accordingly.
The published guidance on reverse charge, released by HMRC, can be found at; VAT reverse charge technical guide - GOV.UK (www.gov.uk)