In our regular Q&A series from Croner Taxwise, VAT adviser, Magdalena Tchorz explains how new rules for the domestic reverse charge will affect construction businesses
Q. My client is a VAT registered joiner on the Flat Rate Scheme who works on a sub-contract basis, mainly for commercial developers, with the odd bit of new residential work. He just heard about the further delay in the implementation of the domestic reverse charge for construction services due to the coronavirus pandemic. He is really keen to hear about the new rules, which affect his business. Have HMRC published any confirmation of this delay?
A. On 6 June 2020 HMRC published an update to the VAT reverse charge for building and construction services.
This marks the second delay to the introduction of the rules. It was originally planned to start in October 2019, but was postponed to avoid the changes coinciding with Brexit.
Implementation of the change will be delayed for another five months from 1 October 2020, until 1 March 2021 due to the impact of the coronavirus pandemic on the construction sector.
The reverse charge is an anti-fraud measure which prevents the supplier from charging VAT to the customer, but then not paying it over to HMRC.
The measure will affect specified supplies of building and construction services supplied at the standard and reduced rates, which are reported under CIS. It will not apply to zero-rated services.
At the same time as announcing the delay HMRC also announced in Business Brief 07/2020, that the legislation will be amended, so that businesses will only be excluded from the reverse charge as end users or intermediary supplies, if they have informed their subcontractors in writing about this fact.
Supply and installation contracts will also be subject to the reverse charge. For example, a joiner constructing a staircase offsite then installing it onsite is making a reverse charge service, even if the charge for installation is only a minor element of the overall charge.
The supplier will not have to charge VAT on their invoice to a VAT registered client. Invoices will have to include a statement to indicate the reverse charge applies, for example: ‘Reverse charge – customer to pay the VAT to HMRC, s. 55A VATA 94 applies’. The following information on the VAT return will be completed by the supplier (sub-contractor):
- box 1: nil; and
- box 6: net value of supply.
When the reverse charge comes into force, a VAT registered business recipient will have to account for the reverse charge VAT on its own VAT return and will be able to recover that VAT (subject to the normal VAT recovery rules). The following information on the VAT return will be completed by the customer (contractor):
- box 1: the output VAT on the reverse charge;
- box 4: the input VAT on the reverse charge; and
- box 7: net value of the purchase.
It should be noted that sub-contractors only making reverse charge supplies will be repayment traders after 1 March 2021 and due consideration should be given for switching to monthly VAT returns.
Furthermore, any VAT registered sub-contractors using the Flat Rate Scheme should consider reverting to normal VAT accounting post 1 March 2021.
Reverse charge supplies are excluded from their flat rate calculations so there is no need to account for the flat rate on reverse charge supplies, but as a flat rate trader they are restricted from recovering input tax. The client might decide to come out of the flat rate from 1 March 2021 and start recovering his input VAT.
The domestic reverse charge will have a significant impact on VAT compliance and cash flow management for the businesses involved. They will need to adapt their accounting systems to deal with VAT.
There will be a negative impact on the cash flows for many affected businesses, as they will no longer get VAT payments from customers where the reverse charge applies.
Businesses will have to review contracts before 1 March 2021 to determine which ones will be subject to the domestic charge, to ensure the correct declarations have been provided in terms of end-user or intermediary status.
For more information and the full list of the services affected by and excluded from the reverse charge please go to HMRC guidance or call our VAT Advice team on 0844 892 2470.
Covid-19: delay to VAT reverse charge on construction services
Revenue and Customs Brief 7 (2020): domestic reverse charge VAT for construction services - delay in implementation
This update is subject to change at short notice as the government releases its own updates – this guidance was last updated Friday 12 June 2020
Further information on covid-19 is available here, Croner Taxwise consultants
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