From 1 March 2021 VAT-registered subcontractors will no longer charge VAT on certain construction services to another VAT-registered business.
Instead the customer will ‘self-account’ for any VAT due this is known as the Reverse Charge.
This change affects both contractors and subcontractors that operate under the construction industry scheme (CIS) and supply certain kinds of construction services in the UK. The reverse charge puts the onus on the customer who receives a construction service to account for the supplier’s output VAT and to pay this output VAT to HMRC instead of the supplier.
The aim is to reduce cases of VAT fraud that have been reported in the building sector where suppliers have charged their customers for VAT but kept the money for themselves.
VAT Reverse Charge – Under the new rules
- VAT registered subcontractors who provide a service and any related goods to a VAT-registered contractor who is CIS-registered no longer need to account for the VAT
- Instead it is the contractor or developer who will account for the VAT as an input tax – as if they made the supply to themselves
- If the customer is a private individual the reverse charge does not apply and VAT should be charged to the individual as normal
From 1 March 2021
- Subcontractors should be notified by the contractor where the reverse charge applies
- Include all the information that is normally required on a VAT invoice except no VAT will be charged
- The invoice should state that the reverse charge applies and the amount of VAT the customer is required to account for under the reverse charge
- The reverse charge will apply to all jobs completed on or after 1 March 2021 but it may also apply to work that was commenced before this date but completed afterwards
Switching to the new VAT regime
- Deciding when the switch to the new VAT regime takes place depends on the tax point i.e. the date of issue of the VAT invoice or the receipt of payment
- Where the tax point is on or after 1 March 2021 then the reverse charge should be applied even for work commenced before this date. Otherwise the existing VAT rules apply
Impact on cash flow
- The changes might provide a cash flow boost to contractors because the VAT previously paid when paying a subcontractor is ‘netted off’ in your VAT return instead rather than being physically paid.
- Conversely subcontractors may see a negative impact on cash flow because the VAT previously paid with their invoice and held before paying the monthly or quarterly bill to HMRC will no longer be received.
