What you need to Know about VAT Reverse Charge
The last update on VAT “reverse charging” for the construction sector was expected to be implemented on 1 October 2019. However, the pandemic that occurred shortly after inevitably postponed the change, causing the government to implement it 17 months later, on 1 March 2021.
Under this new system, citizens will pay the VAT directly to HMRC instead of the suppliers of the VATable services. The driving force behind this change was for the HMRC to eliminate VAT fraud, where suppliers of services charge and receive VAT fees but do not forward them to the government. It applies to construction and building services, which means you’ll have to make some adjustments in your transaction processes. You may also need to work with accounting services for small businesses to ensure that everything is in order. Here’s what you need to know about the VAT reverse charge:
The Criteria for the Reverse Charge to Apply
The VAT reverse charge applies to building and construction services that meet the full criteria irrespective of the contract’s start date for the services or when it was fulfilled. The requirements are the following:
- The supply is within the scope of the Construction Industry Scheme (CIS);
- The supply is standard rated or reduced rated;
- The recipient of the supply is VAT registered;
- The customer is registered for CIS; and
- The customer has confirmed that they are not an ‘end-user.’
Notably, the reverse charge system will not apply to the following:
- Zero-rated supplies of goods and services, which means it does not apply to the construction of buildings to be used for residential purposes;
- Under the CIS scheme in which the ‘contractor’ is not obliged to report the payment to the HMRC due to one of the exceptions listed in the Income Tax (CIS) Regulations 2005;
- The goods and services were given to a customer categorised as an ‘end-user’;
- The supplier is providing materials or goods only,
- To ‘intermediaries’ or those who inwardly supply construction services without altering them and parents or subsidiaries of ‘end-users.’
Generally speaking, if the CIS applies, then the services supplier must determine if a reverse charge will apply and if they should raise the invoice to include VAT. Under the CIS system, construction contracts often state if the client or employer is a ‘contractor’ and informs the ‘sub-contractor’ of the steps to take to receive the full payment without deduction.
With the new changes, construction contracts can include a clause allowing the receiver of the services to declare whether they are VAT-registered, an end-user in line with the reverse charge system, and any factors excluding the reverse charge arrangement.
Defining the End-User
The reverse charge system doesn’t apply when the receiver of goods and services is classified as an ‘end-user.’ An end-user is a person, business, or group of organisations who receive building or construction services but will not supply these services to other people. That means that the end-user may be a developer, the final occupier of a property, a domestic client, or a CIS contractor.
HMRC has made end-users responsible for informing suppliers of their status, usually referred to as an ‘end-user certificate’ or ‘end-user notice.’ In these situations, VAT should be charged in the standard way.
Considerations to Make
The construction industry must maintain a streamlined communication channel within the supply chain to adjust to the significant changes. Doing this will ensure the correct implementation of the reverse charge system, helping providers of VATable services determine if the reverse charge applies or not.
Additionally, end-users must provide their supply chain for new and existing contracts with an end-user certificate or notice affirming their status. Tier 2 contractors or subcontractors will experience an impact on cash flow, as they will no longer receive VAT payments for construction services rendered, which is another consideration for the industry to make.
Understanding the VAT reverse charge system is crucial for ensuring compliance with new regulations, primarily as the HMRC focuses on combating VAT fraud. By familiarising yourself with the changes, you can work with your accountants to adjust your processes accordingly.
1 to 1 Accountants is a team of accountants in Hillingdon and Uxbridge helping small businesses, limited companies, freelancers, and more. We are a modern practice that helps with personal tax affairs, WDF disclosures, payroll services, and all other aspects of accountancy services. Schedule a free consultation with us today!