From 1 March 2021, new rules come into force which will impact how VAT is accounted for in the construction industry. Our Accounting Partner, Amarjeet Singh, explains everything you need to know about this new rule.
The new rules affect the supply of specified building and construction services, together with goods supplied with those services. This is a major change to the way VAT is collected in the building and construction industry and is something that businesses working within the sector need to be aware of and potentially to take action on.
Regardless of whether a sub-contractor is a gross contractor, 20% or 30% contractor, the domestic reverse charge, DRC, will affect standard and reduced rated supplies wherever payments are reported through the construction industry scheme (CIS). There is, however, an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service, whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.
How the domestic reverse charge works
The reverse charge means the customer receiving the specified service must pay the VAT directly to HMRC instead of the supplier. In turn, the customer can recover the VAT, subject to the normal rules for VAT recovery. Some businesses will therefore become repayment traders under DRC as their VAT Return becomes a net claim from HMRC instead of a net payment.
One way of speeding up payments due from HMRC would be to consider monthly VAT returns, but if you decide to choose this option then the additional reporting needs to be taken into account. If you are on the Flat Rate Scheme or Cash Accounting Scheme for VAT, you need to consider your individual circumstances urgently to ensure the schemes are still right for you.
What you need to do to be ready for the start of the domestic reverse charge
There are a number of actions you need to take to be ready for the new rules when they come into effect on 1st March. These include:
checking whether the reverse charge affects either your sales, purchases or both
make sure your accounting systems and software are updated to deal with the reverse charge
considering whether the change will have an impact on your cashflow
making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate
What contractors need to do
In addition to the points above, if you’re a contractor you’ll also need to review all your contracts with sub-contractors to decide if the reverse charge will apply to the services you receive under your contracts.
What sub-contractors need to do
If you’re a sub-contractor you’ll need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end-user or intermediary supplier. Remember, the default position is that DRC covers specified supplies reported under CIS unless confirmed otherwise by your customers.
How we can help
If you'd like to read more about how the domestic reverse charge procedure works, you can find details on the Government website here.
At Chesterton House Accounting Services, we understand that as a business owner these changes are hard to keep up with. Our Accounting Team is constantly learning and understanding the intricacies of changes like these to take the worry off your shoulders so you can concentrate on running your business.
If you're already a client of Chesterton House Accounting Services then you're sure to be receiving our advice already, but if you are new to us or unsure about what the domestic reverse charge procedure means for you, then our friendly and experienced Team will be pleased to help. Contact us today to speak with one of our Accountants.
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