How to tackle the VAT reverse charge for construction
From 1 March 2021, a domestic VAT reverse charge will be introduced, applicable to most businesses supplying or receiving building and construction services. More specifically, you must use the reverse charge if your business is VAT-registered in the UK and the payment for your supply is reported within the Construction Industry Scheme (CIS). The services supplied must be standard or reduced rated.
Trimble Financial Suite modules - Costing and Accounts - have been updated and are now ready to handle the new domestic VAT reverse charges. Our products are fully equipped to support our MEP customers as their business needs evolve on the backdrop of the new regulations. Please find information at the end of the article on how you can benefit today from the new software updates.
What is the VAT domestic reverse charge?
Essentially, the VAT reverse charge for construction services shifts the responsibility to account for VAT from the supplier to the customer. Businesses supplying building and construction services (e.g. sub-contractors) to a VAT-registered customer (contractor) will no longer have to pay the VAT themselves. Instead, they will require the customer to do so who has to account for VAT directly to HMRC (HM Revenue and Customs).
When does the VAT reverse charge for construction apply?
On the Government’s website it is stated clearly that the new rules are intended to be applied only for transactions between registered businesses.
The VAT reverse charge MUST therefore be applied in the following circumstances:
- you supply to a UK VAT registered customer
- your payment will be reported under the Construction Industry Scheme (CIS)
- you supply standard or reduced rated services
- your business is not supplying staff and/or workers
On the other hand, you should NOT be calculating VAT reverse charge if:
- your customer is an end user who does not intend to make further on-going construction requests
- your customers are intermediary suppliers who are connected (e.g. a landlord - tenant)
- your customer is not VAT registered in the UK
- your supplies are not covered by the CIS
- the supplies are zero-rated
Here you can view the full official list of construction services that are and aren't affected by the VAT reverse charge.
How can you prepare for these changes?
Businesses must be sure to prepare for the impact of the VAT reverse charge rules on their day-to-day operations. Not only do they have to ensure that their accounting systems are suitable for the new invoicing and resource planning requirements, but they also have to train their teams to respond accordingly to the new requirements.
1. Find out the status of your customers
Firstly, you must inquire whether your clients have the status of an end user, intermediate supplier or VAT registered business. They must provide you with a written notification in all three cases. If they are a registered business, you must receive a written confirmation of their VAT registration and CIS status. You can check the validity of your customer’s VAT number here and check CIS registration here.
2. Change your invoices if the rules apply to you
Secondly, you must evaluate your contracts to determine if the VAT reverse charge applies to your situation and inform your customers. Your invoices should still feature all information required on a VAT invoice but must make clear that the customer is required to account for the VAT. There are a few guidelines from HMRC on accepted terminology in this regard:
- “VAT Act 1994 Section 55A applies”
- “Reverse charge: S55A VATA 94 applies”
- “Reverse charge: Customer to pay the VAT to HMRC”
The invoice should also clearly state how much VAT is due under the reverse charge conditions, or - if the VAT amount cannot be shown - the rate of VAT. The VAT should not be included in the amount charged to the client however. Here you can find a reverse charge VAT invoice example.
3. Update your accounting software
Third, consider any steps you might need to undertake in order to make sure your accounting software packages are fully equipped to support the new VAT regulations. Trimble have made several updates to our Financial Suite modules in the light of the new developments and our software solutions are now prepared to handle the new domestic VAT reverse charges. Read more about it below.
How do the new rules affect contractors’ cash flow?
Contractors may benefit from an improvement in the cash flow as the VAT you were previously required to pay to the sub-contractor must now be paid directly to HMRC and will therefore be compensated for in your next VAT return.
You must make sure your team is correctly equipped to properly account for VAT in the invoices you receive from your suppliers. In your VAT return, you must enter the value of output tax on sales to which the domestic reverse charge applies in Box 1 and not in Box 6.
How do the new rules for VAT on building work affect sub-contractors’ cash flow?
If you run a sub-contracting business, chances are that your cash flow will be impacted by the VAT reverse charge for building works. According to the VAT processing rules up until March 1st 2021, you would include the VAT charges in your invoices towards your customers. That means that the VAT received from your customers (in the case of timely payments) would sit in your cash reserves to be used for purchasing building materials, until having to pay it forward to HMRC.
Once the new rules are applied, you will no longer be invoicing your customers for VAT and the payments towards you will be made excluding VAT. Hence your business will have to draft a plan to accommodate for these changes and avoid hiccups in the supply chain, considering that the gross value of payments coming into your business will decrease.
As you no longer receive VAT on your sales, it can be the case that you become a repayment trader, having to claim money from HMRC instead of making payments. In this case, HMRC suggests you apply for monthly returns to profit your day-to-day cash flow. You can make this request using your online VAT account as seen on the reverse charge VAT explainer page provided by HMRC.
Why was the VAT reverse charge introduced in the UK?
This measure was introduced to combat missing trader fraud, in which case a sub-contractor would charge VAT but not pay it forward to HMRC. As the VAT reverse charge UK rules makes it the customer’s responsibility to account for VAT, the supplier no longer has the possibility to vanish without paying the VAT to HMRC. View here a reverse charge VAT example of a transaction between supplier and customer as seen on the Ross Martin blog.
How Trimble supports customers for the VAT reverse charge
In light of the new developments, we have made necessary adjustments to our financial solutions in order to support our customers as they navigate the VAT processing changes ahead of them.
The Trimble Financial Suite modules - Costing and Accounts - are now geared to handle the new domestic VAT reverse charges coming in March 2021. Here are the new capabilities of the software:
- You can enter in the application Construction Industry Scheme (CIS) numbers and VAT Registration Numbers for your clients and suppliers
- You can configure and use CIS Reverse Charge VAT codes for appropriate sales and purchases
- Your VAT Return will allocate Reverse VAT correctly based on VAT code assignment
- You can map in Sage Accounts for CIS Reverse Charge codes
In order to receive the update, you must have an active support contract and have migrated to the latest SQL version of ContractMaster (i.e. 3000.0.0.3 or newer) if you are using Enterprise Costing and/or Accounts. You may contact the Trimble Support Team via phone (01908 294405 or 0845 450 2880) or email (email@example.com) for enquiries.
You can be confident in Trimble to provide what your MEP business needs.