As we reported back in July 2020, plans for the VAT reverse charge in the construction sector were postponed for the second time and will now come into force in March 2021. Despite having fair warning of the changes, there will still be many companies in the sector that are unprepared for this significant alteration.
HMRC is introducing these changes to tackle the substantial issue of ‘missing trader fraud’ tax loss. Up to 150,000 large and small construction contractors and sub-contractors will be impacted and need to amend their administrative processes and digital accounting software.
What will change?
From 1 March 2021, suppliers of goods and services (covered by the Construction Industry Scheme) will not be required to pay VAT to HMRC as the responsibility falls to the VAT registered customer. The customer must declare VAT due as output tax on their return and reclaim through the reverse charge accounting.
The VAT reverse charge applies to supplies of services such as:
- Construction, repair, extension, alteration or demolition (whether permanent or not)
- External or internal painting and decorating
- Installation of heating, lighting, air-conditioning, power and water supply, drainage, ventilation, sanitation and fire protection
The reverse charge doesn’t apply to sales of goods direct to the final customer or those not in construction. Certain services such as surveyors or architects consultation, ‘zero-rated’ new home construction, hire of machinery (without an operator) and its delivery to site, signage and installation of security systems are also not included in the new system.
What are the major implications?
The main concern for construction businesses is the impact on cash flow as companies will have to wait to recover VAT via their VAT return, creating a delay and hitting working capital hard.
There will undoubtedly be an increased administrative burden as companies establish which of the supplies they make and receive will be subject to the reverse charge and which contractors are VAT and Construction Industry Scheme (CIS) registered. They should also request a notification from their customers that they are an end-user.
When customers purchase construction services, they will have to make sure they have been charged the correct VAT as it cannot be recovered and penalties can be imposed for accepting incorrect VAT invoices.
Now is the time to confirm that your construction business is ready for the VAT reverse charge plans. If you are worried about the imminent changes for your business, get in touch with the construction experts at CRM who have been getting to grips with these changes for months and can guide you through the details. Give CRM a call on 01865 379272.