Reverse charge VAT

Are you prepared for the VAT domestic reverse charge?

The VAT domestic reverse charge procedure is a new way of accounting for VAT in the construction industry. It is due to come into effect in the UK on 1 March 2021, having previously been delayed from 2019 and then October 2020 by HMRC.

The domestic reverse charge will be introduced without a transitional period and will have a significant impact on the accounting practices and cash flow of businesses in the construction sector. 

In summary, for services a CIS registered sub-contractor provides, they will require the contractor engaging them to handle and pay the VAT directly to HMRC.

Who is affected by reverse charge VAT?

Under the new regime, a VAT-registered business, which supplies construction services to another VAT-registered business for onward sale, will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.

It is the recipient of that service that must account for the VAT due on that supply through its VAT return, at the appropriate rate, instead of paying the VAT amount to you the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules. This would normally mean a nil net tax position with no VAT being due to HMRC.

If your business is affected here’s how you can prepare and apply the upcoming changes.

Ensure your software is up to date

Construction businesses will need to ensure their accounting systems are capable of processing reverse charge supplies and make ongoing checks to ensure that supplies and purchases are correctly treated. 

If you use accounting software you’ll need to check it will deal with the new VAT domestic reverse charge. For example, if you are using desktop software, you will need to check with your supplier if a manual update is available.

The good news is, if we complete your book-keeping or you already use Xero, you’re all set because Cheltenham Tax Accountants are ready for this change and Xero has already been updated to help you comply with the VAT domestic reverse charge.

If you don’t currently use software for your business then this is a great time to start. Using cloud accounting software like Xero makes life a whole lot simpler especially when dealing with CIS and VAT.

Communicate with your staff, contractors and/or customers

Make sure you are aware of the reverse charge and how it will work.

Subcontractors will need to confirm that they are working for a VAT registered business and whether they are working for an end user, or for someone connected to an end user, including landlords and tenants.

If you are a subcontractor be sure to contact your contractor customers to make them aware you will be applying the domestic reverse charge to invoices from 1 March 2021.

Likewise, if you are a contractor you should also be proactive in contacting your VAT-registered subcontractors prior to the 1 March 2021 to ensure they are aware of these changes and don’t invoice you for VAT.

Changes to your invoices for reverse charge vat

Invoices for services subject to the domestic reverse charge must include all the information required on a normal VAT invoice. However, they must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT.

If you are a contractor here is an example invoice:

Consider your cash flow

Consider whether the change will impact your cash flow.

If you are a subcontractor then it’s likely your cash flow will be impacted as you will no longer be receiving the VAT payment from your customer. Subcontractors that rely on VAT collected from their customers as working capital until they have to remit it to HMRC are likely to suffer from the loss of cash flow.

If you are the contractor, you will likely have a short term cash flow benefit as you will no longer be paying the VAT amount to your subcontractors.