New VAT scheme for Construction industry -here’s what you need to know
Time to double check your invoicing system.
Does your business will fall within the new Construction VAT reverse charge scheme? The official name is the Domestic Reverse Charge scheme (DRC – another new acronym for you!)
You may have heard rumours about this new procedure for collecting tax within the building and construction industry. It was delayed twice, in 2019 and then 2020 but now it’s being implemented from 1st March 2021.
It is not something you can ignore, it changes the way you invoice if you use or are a subcontractor. If you use the CIS scheme basically.
So if your business is VAT registered and carries out work under the CIS regime then you need to be aware of the new rules.
Essentially the scheme is cutting out the ‘middle wo/man’ re VAT collection, specifically in the construction industry. Whereby the only person paying vat is the end user in the chain (in most cases, the client/customer) and the only person charging vat is the person invoicing that client/customer.
This also prevents people in the industry claiming for vat and not declaring it. It’s to make everything simpler and more transparent.
The good news is that if you are with us on XERO, you’re all set – XERO has already been updated to comply with this new scheme.
What does this mean in practice?
If you’re a Contractor
If you are using the services of a VAT registered Sub-contractor you will be responsible for alerting the revenue of the various invoice values but they will be void of actual vat subtotals/percentages. So even if the contractor is VAT registered, in this instance, if you are not the end client (who can’t usually claim) their invoice to you will not have a VAT element.
It’s very similar to the current CIS regime. Your VAT registered subcontractor should invoice you net of VAT, and instead of charging VAT at the standard or reduced rate, they should state on the invoice that the supply is subject to the VAT reverse charge.
On your VAT return you/we will still declare both the sales VAT and the purchase VAT elements.
This will apply to all VAT registered subcontractors who carry out work for your company.
There should be a positive impact on your cash flow as you will no longer be paying the VAT element on the invoices for the subcontractors.
If you’re a Subcontractor
If you are a subcontractor providing the services, you will need to send your invoice net of vat, ie don’t charge the person you are invoicing for an additional VAT element. As stated above they will declare your invoice to HMRC.
If you usually rely on the extra cash from VAT payments to help with cash flow in the quarter before it needs to be paid, this may cause cash flow issues as you will now not actually receive the VAT element of your invoice, if the invoice is not for the end user.
Exceptions
Zero rated supplies on new builds are not subject to the reverse charge as there is no VAT involved anyway.
The scheme starts on 1st March 2021 so please confirm you understand the new rules, or get in touch if you would like a call to go through things in more detail. 01763 257882 or email David@theaccountancypractice.com
I have also attached HMRCs “Buyers” and “Sellers” flowcharts which should help you to determine whether or not a supply falls within the regime or not.
SO IN SUMMARY, WHO IS AFFECTED ? – THIS IS FROM THE HMRC WEBSITE:
If you sell building and construction services, the reverse charge will need to be used when:
- your customer is registered for VAT in the UK.
- payment for the supply is reported within the Construction Industry Scheme (CIS).
- the services you supply are standard or reduced rated.
- you’re not an employment business supplying either staff or workers, or both.
- your customer has not given written confirmation that they’re an end user or intermediary supplier.
If you buy building and construction services, the reverse charge will need to be used when:
- payment for the supply is reported within the Construction Industry Scheme (CIS).
- the supply is standard or reduced rated.
- you’re not hiring either staff or workers, or both.
- you’re not using the end user or intermediary exclusions.
Ensuring your clients are compliant
For contractors, it is important for them to review their current contracts with subcontractors to check if the reverse charge VAT applies to the services they receive (if the subcontractors they use are CIS registered then it’s very likely they will – the full list of services covered can be found on the HMRC website).
Here’s a link to the HMRC guidance
FLOWCHARTS
If you prefer to see things visually, HMRC has created some flow charts at the bottom of each section here.
If you sell building and construction services
Use this flowchart to help you decide if you need to use the reverse charge.
The reverse charge will need to be used when:
- your customer is registered for VAT in the UK
- payment for the supply is reported within the Construction Industry Scheme (CIS)
- the services you supply are standard or reduced rated
- you’re not an employment business supplying either staff or workers, or both
- your customer has not given written confirmation that they’re an end user or intermediary supplier
If you buy building and construction services
Use this flowchart to help you decide if you need to use the reverse charge.
The reverse charge will need to be used when:
- payment for the supply is reported within the Construction Industry Scheme (CIS)
- the supply is standard or reduced rated
- are not hiring either staff or workers, or both
- you’re not using the end user or intermediary exclusions
As ever, please get in touch if you’d like to discuss your transition to this new system
01763 257882 or email David@theaccountancypractice.com