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HMRC’s new domestic reverse charge for construction services comes into force on 1 March 2021.
There are lots of rules surrounding this, and we have tried to summarise this as simply as possible, but you must be familiar with the full rules if this affects you. Any errors will have significant impact on the VAT you pay and you wouldn’t want to either under or over pay VAT.
What is it and who does it apply to?
The VAT domestic reverse charge for services is a change in how VAT is handled for certain kinds of construction services in the UK. The scheme means that those supplying construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT. The customer will effectively both pay and reclaim the VAT at the same time.
In simpler terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.
This will apply to standard VAT rates supplies, reduced VAT rate supplies. It will not apply to zero-rated supplies.
What do you need to do?
At the moment you usually add VAT at 20% to your sales invoices. From 1 March 2021, if you issue an invoice to a Contractor in the construction chain of events you no longer add VAT, you must state on the invoice what the VAT amount or rate should have been and that the invoice falls within reverse charge rules e.g. ‘’Reverse charge: S55 VATA 94 applies’’
You have to consider what services you are supplying and to whom as you won’t drop the VAT on all of the invoices only some of them. So, you have to check the detailed rules on how this works and ensure VAT is charged correctly.
Contractors (you have subcontractors)
Your subcontractors will issue you with invoices, but from 01 March 2021, it is likely that most of them will not have VAT, but state Reverse charge rules apply.
You must enter the invoice as if it has VAT on it, even though it doesn’t. I know what you are thinking here, how can I reclaim the VAT on an invoice when I haven’t paid it? The answer is you cannot. Therefore, at the same time you must enter an equivalent amount of output/sales VAT into your accounts. The effect is the two VAT amounts cancel down to zero. You must enter VAT only in your accounts i.e. that ultimately reports as output tax in box 1 of the VAT return, DO NOT also enter any figures as sales which report as Box 6 in your VAT return.
What you will need to consider is
- Am I registered for VAT and involved in the construction industry?
- Will this invoice I am producing be after 01 March 2021?
- Is the person I am invoicing a contractor in the construction chain? (e.g. if you are completing work for a homeowner or the ultimate property owner, they are not.)
- Are the services I am supplying on the list of reverse charge services so the whole invoice has no VAT?
- Did I put the ‘Reverse charge: S55 VATA 94 applies’ statement on my invoice?
- Have I received an invoice with this statement? Remember to add VAT and an equivalent amount of sales/output VAT.
- Did I read the detailed rules, in case there is something in there that impacts on me?
- Is my bookkeeping package capable of coping with this new change? Due to the complexities of this new legislation our bookkeeping spreadsheet can no longer be used to prepare your VAT return.
Whilst we highlight some main areas, we recommend that you read HMRC’s guidance here.
HMRC are also offering free webinars to assist businesses, where you can attend a live webinar.
The VAT domestic reverse charge was initially due to come into force in October 2019. This was pushed back until October 2020 to enable businesses to prepare for it. Due to the pandemic the decision was made in June 2020 to delay this by a further 5 months to 01 March 2021.
Whilst there is no discussion currently about postponing this change again, you should keep up to date with any announcements from us or HMRC, in relation to this.