VAT Construction reverse charge – Are you ready?
THE NEW VAT RULES FOR CONSTRUCTION SECTOR START ON 1 MARCH 2021
New VAT rules are due to come into effect on 1st March which will impact accounting for VAT for transactions in the construction sector. The new rules are called “the domestic reverse charge for supplies of building and construction services”.
Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the new reverse charge system, the sub-contractor will not charge VAT on their invoice to the contractor for whom they are working and will not account for output VAT, although they will identify the rate and amount of VAT due and notify their customer that the VAT must be accounted for by them on their VAT return. The sub-contractor will then be paid only the net value of the work done without the VAT.
If you are a sub-contractor, contractor, or both, but are not VAT-registered, the new rules with not affect you.
If you are a VAT-registered sub-contractor… supplying services subject to the new VAT reverse charge rules, you will need to make this clear on your invoice to the contractor. HMRC has approved the following wording, and we suggest our clients use this.
“Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant rate as shown above”
VAT-registered sub-contractors using Xero will need to use the Domestic Reverse Charge @ 20% & 5% (VAT on Income) rates when drafting and submitting their sales invoices. If these VAT rates are not visible, you will need to ‘switch’ these on by simply selecting the ‘Add Domestic Reverse Charge Rates’ within the Tax Rates function in Advanced Accounting. The software will then make sure the VAT element of the transactions is correctly omitted from the sales invoice and VAT Return.
If you are a VAT registered contractor… receiving supplies from the sub-contractor you will need to enter the VAT identified on their sub-contractor’s invoice in box 1 of your VAT return as well as claim this back in box 4 of the return.
VAT-registered contractors using Xero will need to use the Domestic Reverse Charge @ 20% & 5% (VAT on Expenses) rates when processing their sub-contractor invoices. Again, if these VAT rates are not visible, you will need to ‘switch’ these on by simply selecting the ‘Add Domestic Reverse Charge Rates’ within the Tax Rates function in Advanced Accounting. The software will then take care of the postings to the VAT Return for you.
WHO DOES THE REVERSE CHARGE APPLY TO?
Typically it will affect sub-contractors supplying their services to other contractors in the construction sector.
This applies if the services provided are:
- standard rated or reduced rated, and
- within the scope of CIS.
Supply and fit
Although the provisions apply principally to services in the construction sector, they cover all supplies of labour and materials in a single contract or transaction. This is the case even where only the labour element must be reported under CIS.
WHO DOES THE REVERSE CHARGE NOT APPLY TO?
End users
The reverse charge is not intended to apply where a contractor works directly for an end user. End users are consumers and businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them, namely those who have an interest in the land where the work is being undertaken. Where the end user is VAT and CIS registered, the reverse charge does not apply to supplies made to them where they notify the contractor in writing that they are an end user.
If you require any further information or assistance, please contact us.