From 1st March 2021 the delayed new ‘reverse charge’ mechanism will apply for VAT purposes to certain transactions undertaken within the construction industry. This new regime is being introduced by the Government as a response to ‘missing trader’ fraud. This Briefing Note sets out how these proposals will work and how they may affect your business.
What is a ‘reverse charge’?
Normally, when a VAT-registered business makes taxable supplies, it is required to add VAT to its invoice at the appropriate rate. It then accounts to HMRC for the VAT collected from its customer.
Under a reverse charge mechanism, it is the customer (if they are VAT-registered) who accounts for the VAT. The supplier does not charge VAT on its invoice and does not include VAT on its VAT return for the supply made (although it will still report the net value of the sale).
What will the new reverse charge apply to?
The charge will apply to the provision of services falling within the scope of the Construction Industry Scheme, together with any goods supplied with those services, by one VAT-registered business to another for onward sale.
The regulations provide a detailed list of construction services that fall within the scope of the reverse charge.
Are there any exceptions to the charge?
The reverse charge will not apply to:
- zero-rated supplies,
- supplies made to the end user of the property, such as the property owner or directly to a main contractor who is selling a new building to a customer,
- supplies between landlords and tenants, or
- supplies where the customer makes onward supplies of those services to a connected party.
How will my business be affected?
If your business makes supplies of construction services:
- you will need to determine whether those supplies fall within the remit of the reverse charge, requiring additional due diligence work to be undertaken on your business customers and contracts,
- where the supply falls under the reverse charge, any relevant invoices will no longer include VAT and you will have to include a prescribed statement on the invoice regarding the application of the reverse charge,
- as you will no longer be collecting (and paying over) VAT on affected sales, there is likely to be an impact on your cash flow, and
- if using the flat rate scheme you should assess whether it will better to withdraw from this.
If your business receives supplies of construction services that are subject to the reverse charge:
- you will have to determine the correct rate of VAT to be charged on supplies received, and
- you will need to generate a VAT charge when processing your supplier’s invoice and include this as output tax on your own VAT return. An equivalent amount can be claimed as input tax, subject to the usual restriction for exempt supplies you may make.
How we can help you
We can assist you with implementing the new charge, in particular, with ensuring that your accounting systems and processes are appropriate and capable of handling the changes, as well as advising on how the new regulations may apply to specific projects and activities that your business is involved with.
Please get in contact with Lee Palmer if you have any questions regarding this change to the legislation.