Is your building company part of the Construction Industry Scheme (CIS)? With the new VAT domestic reverse charge for building and construction services, the way you handle and pay VAT may change. Understanding the changes is key – and this article provides useful guidance for you.
On 1 March 2021, the VAT reverse charge came into force. It means VAT registered subcontractors (the supplier) who provide a service plus any related goods to a VAT registered contractor (the customer) who is CIS registered doesn’t need to account for the VAT.
Now, the customer needs to account for the VAT as an input tax – as if they had made the supply to themselves. It’s worth pointing out that any building and construction materials used to supply the services are included – but this doesn’t apply to materials bought and sold without related services.
Why the new legislation has been applied
The government rolled out the mandatory reverse charge initiative with the goal of combatting fraudulent activity in the construction industry – this totals millions of pounds each year.
The simplest way to remove subcontractor VAT fraud (which is also known as carousel fraud) is to take the option to charge and collect VAT away from the participants. By doing this, it’s possible to remove the flow of money, therefore meaning it’s harder to commit fraud.
As the VAT reverse charge now makes it the responsibility of contractors to account for VAT, subcontractors have less chance to ‘disappear’ without paying tax to HMRC.
Services and exemptions to be aware of
HMRC’s website lists services that the VAT reverse charge applies to. It also features a number of exemptions, so it’s definitely worth checking the list.
According to HMRC: “If still in doubt, provided the recipient is VAT registered and the payments are subject to CIS, it is recommended that the reverse should apply.”
But if you’re unsure whether the new legislation applies to the services your business provides, it’s certainly worth speaking to either HMRC or a VAT specialist, such as an accountant.
A ‘light touch’ to errors
When new legislation is introduced, there’s always the possibility that innocent errors could creep in. Therefore, HMRC has said it will apply a “light touch” to any mistakes made in relation to changes brought about by the VAT reverse charge in the first six months of its implementation.
This will help you adjust to the changes and ensure your processes are working accordingly. But don’t use this as an opportunity to ignore the requirements or make deliberate errors – doing so could result in negative repercussions.
What your business needs to do now
There are a number of things your business can do to ensure you stay on the right side of HMRC and the VAT reverse charge. Here’s four to consider.
1. Review your business relationships
Start by reviewing your existing business relationships. For buyers and suppliers who are within the construction supply chain, now is the time to review any transactions between their own VAT-registered firms and other VAT-registered businesses.
You need to determine whether the new legislation affects both purchases and sales, or just one of them. No matter your status, take the time to inform your suppliers and clients about the changes so you can ensure the supply chain keeps moving.
2. Review your processes
If you’re a contractor, put systems in place to correctly account for VAT on reverse charge VAT invoices that you get from subcontractors, then report on these sums to HMRC. Subcontractors, meanwhile, need to adapt their invoicing systems to correctly send invoices that are inclusive of VAT, or to send VAT reverse charge invoices.
3. Get ready for possible cash flow changes
The changes aren’t expected to affect the cash flow of contractors because they are tax neutral. However, subcontractors should consider the impact of not receiving VAT from their customers and what that means for their cash flow. It’s worth looking at how that impact can be mitigated.
4. Keep good records
Contractors need to keep accurate records that relate to the calculation and VAT accounting for reverse charges, and also have to ensure VAT is correctly processed. This is on top of keeping track of how much CIS tax is withheld from subcontractors in your accounting.
In addition, they have to check the status of subcontractors, ensure their services are covered by CIS, and check subcontractors aren’t issuing VAT inclusive invoices – they now need to invoice according to the rules of the VAT reverse charge.
Subcontractors, meanwhile, need to stay on top of which of their customers aren’t end-users but are VAT registered – for those customers, they may need to issue reverse charge VAT invoices.
Final tips to help with the VAT reverse charge
Take the time now to educate yourself about the new VAT reverse charge. Want to take control of your processes? Start by reviewing them and make any necessary amends. Meanwhile, contractors should speak to their subcontractors about the changes (and vice versa).
Check out HMRC’s guidance to ensure your invoices are updated and used correctly. And use compliant cloud accounting software, such as Sage Accounting, to ensure you’re managing your VAT reverse charge requirements.
Sage Accounting software is CIS and VAT reverse charge compliant. Several apps to help building and construction firms are now integrated with Sage Accounting, which is designed to relieve the burden of administration by automating everyday finance and people management tasks. These apps enable small businesses in the construction industry to stay organised, keep on top of payments, have full visibility of cash flow, and engage with their employees.
*Disclaimer: This blog post is sponsored content, which is independent of the FMB. Publication does not constitute endorsement or recommendation from the FMB.