It’s hard to keep up with all new legislation, when you’re busy running your business. Below are key points to the upcoming changes. Take advantage of the next few months and prepare for change that will affect you.
Vat reverse charge starts on the 1st of March 2021
It’s a major change that will affect the construction industry. It will affect you if you are VAT registered and if you supply or receive services under the construction industry scheme. What does it mean to you? In short:
You will no longer pay VAT to HMRC, it will be the end customer who will pay the VAT directly to HMRC instead of paying it to the supplier. Customers will be able to recover the VAT under the normal VAT recovery rules. Your VAT returns will change.
This will reduce the money coming into your business and directly affect your cash flow, so plan ahead if you require extra funding.
Your invoices will need to show the right information, and you will need to collect additional paperwork from your clients.
When to apply the reverse charge
As mentioned before the new rules start on 1st of March 2021, after that day you will need to apply to the new rules. All services carried out before 1st of March 2021, should be charged accordingly to normal VAT rules.
Only apply new reverse charge if you provide specified services under construction industry that includes:
- Constructions, altering, repairing or demolishing buildings
- Internal cleaning of buildings - if part of constructions
- installing heating, lighting, air-conditioning, drainage or similar systems
- Internal or external painting or decoration of buildings
- If your clients are not the end user or intermediate supplier, you will need to apply new VAT reverse charge
- You’ll need to apply reverse charge if you provide your services at standard or reduced rate
However, as there are exemptions, do not apply new rules if:
- If you apply 0% VAT charge for your services.
- If your client is not VAT registered in UK
- It will not affect all the services you supply, if you provide employment services, you will not have to apply new rules to your invoices.
- If your client is not registered for CIS
- If your client is an end user of the services, in this case you will need a written confirmation from the customer, that they are end users.
Here, you will find a handy flowchart provided by HMRC: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878587/Annex_1_-_VAT_domestic_reverse_charge_for_building_and_construction_services.pdf
How the reverse charge will affect your business?
As you no longer charge VAT on your services, that means it will reduce the amount of the money coming into your business, at this point you will need to consider your cash flow. You will no longer have to pay the VAT to HMRC, that was due usually on your sales invoices. It also means that you may become a frequent VAT repayment trader if you usually buy substantial amounts of materials to carry out work for main contractors. If that’s the case, you may want to consider preparing your tax return on a monthly basis instead of usual quarterly to improve your cash flow.
What to show on the invoice?
There are specific conditions to meet on your invoicing after 1st of March 2021 to reflect the changes and you may need to consider upgrading your accounting software to meet new requirements.
Your invoice should show the percentage of the VAT due, but you also need to show on the invoice, that VAT is a subject to reverse charge. You also need to make clear that customers need to pay VAT to HMRC, not to you. Do not show the amount of the VAT that is due to HMRC.
Don’t worry, for the first six months from the beginning of the new rules, HMRC will apply a light touch period if any genuine errors occur and you act to correct them and act in good faith to comply with new rules. You will be charged penalties if you deliberately take advantage of new rules and not account for them. As soon as you find out about any error, act quickly as it will be very difficult to correct and recover any overpayments made to HMRC. For that reason, upgrading your software will help you to comply with new rules and send your VAT returns in a timely manner.
- Will my subcontractors apply the VAT reverse charge? Will I have to pay the VAT to HMRC instead of them?
- Yes, if all conditions are met subcontractors are required to apply the reverse charge. If the subcontractor does not apply VAT or is not registered for VAT.
- What if I’m not registered for VAT? What if my customers not registered for VAT
- Do not apply the reverse charge unless both of you are registered for VAT.
- Do I apply the VAT reverse charge even if I’m paid gross for CIS?
- Yes, whether the constructor is paid gross or net, it doesn’t affect the VAT reverse charge. If all conditions are satisfied constructor apply vat reverse charge.
- What if I use the VAT cash accounting Scheme or VAT Flat Rate Scheme?
- Apply usual rules for VAT reverse charge. Do not use the above.
- How do I know my customer is an end user?
- Ask them and get confirmation in writing (via email or paper), you may want to prepare template with specific wording on the confirmation
For more details please refer to the HMRC website: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services