VAT domestic reverse charge applies 01 March 2021
In the 2017 budget, the Government announced a VAT reverse charge to combat “missing trader” fraud. The scheme is called VAT reverse Charge and the date of implementation is 01 March 2021.
In simple words from 1 March 2021, the domestic VAT reverse charge must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:
- for individuals or businesses who are registered for VAT in the UK
- reported within the Construction Industry Scheme
There are 2 aspects of this scheme.
You need to decide if you are a sub-contractor or contractor.
Contractor
As a contractor, you will not pay the VAT to your sub-contractor. You need to pay VAT to HMRC directly through your own vat return.
Sub-contractor
This also means that your contractor will not pay VAT to you. They will pay the VAT directly to HMRC through their own VAT return.
Note: This applies to where both the parties are VAT registered
Preparing for VAT reverse charge
Avoid getting caught if you are not aware of the reverse charge. Please take time to prepare and understand the new changes.
- make sure your invoice presentation and calculation are right.
See this link for example:
https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/879167/Invoice_example_1_-_reverse_charge_applies.pdf - make sure your accounting systems and software can deal with the reverse charge
- consider whether the change will impact your cash flow
- make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work
Goods and services covered in new Reverse Charge.
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
What you need to do
- Check if your customer has a valid VAT number.
https://ec.europa.eu/taxation_customs/vies/ - Check your customer’s CIS registration.
https://www.gov.uk/what-you-must-do-as-a-cis-contractor/verify-subcontractors - Review your contracts to decide if the reverse charge will apply and tell your customers.
- Inform your customer to confirm whether they are an end-user or intermediary supplier.
- Notify your customer that VAT reverse charge will apply.
- Find out how to record the reverse charge in your accounts.
- The reverse charge should not be applied to supplies to end-users and intermediary supplier businesses. End users are deemed to be consumers or final purchasers of building and construction services
Record keeping
There are 3 areas where a business is must keep records separately from 01 March 2021
- Invoicing and payment
If you are using self-billing, please add the following wordings.
“Reverse charge: We will account for and pay the output tax due to HMRC”
“Reverse charge: As the UK customer, we will pay the VAT due to HMRC” - VAT returns
This is a more complex exercise. We recommend a competent bookkeeper or a qualified accountant to maintain the records. This new change requires you to declare your reverse charge VAT in a different method than the old method. - Recording transactions
We also recommend a good Accounting software package for you to record your transactions. Days where you simply add an amount on a calculator and prepare VAT return are gone. Each VAT transaction needs to reflect the correct VAT code.
01 March 2021
Any invoice raised on 01 March 2021 is subject to a VAT reverse charge regardless of when the work started or finished. HMRC indicates that they will be ready to help in dealing with the errors and corrections.
For more assistance on this matter contact Sterling Finance and we will be able to help. Our contact details are:
Sterling Finance UK Limited
Website : www.sterlingfinance.net
Email : info@sterlingfinance.net
Tel : 0161 339 4989
