Reverse charge VAT in the construction sector is due to kick in from 1 March 2021. I say “due” because this has already been delayed twice in the last 18 months, and a third delay may well happen again in the weeks ahead.
Originally set to come into force on 1 October 2019, the reverse charge was delayed by a year and then later postponed until 1 March 2021 due to COVID-19.
There is every chance the coronavirus will see HMRC announce a third delay at the last minute, much like it did with waiving fines for self-assessment penalties just five days before last month’s deadline.
Last September, HMRC wrote to VAT-registered construction businesses advising them to check whether or not they might be liable for the reverse charge.
Based on that, we are pressing on with briefing VAT-registered business owners who operate under the construction industry scheme (CIS). This significant tax change directly affects them.
What is reverse charge VAT?
The reverse charge is an anti-fraud measure which will see VAT-registered subcontractors who supply qualifying construction services not charging the main contractor for VAT. Instead, the main contractor will need to collect the VAT and pay it to HMRC.
It only applies to standard (20%) and reduced-rate (5%) supplies of specific building services made to VAT-registered businesses, which in turn make onward supplies of those services.
The reverse charge will not apply to zero-rated supplies of construction services, while landlords and property developers are exempt.
Types of construction supplies
Broadly speaking, any construction service covered under the CIS is liable for the reverse charge. Examples include constructing, altering, repairing, extending, demolition of or dismantling buildings or structures.
Construction services which form a vital part of any of the above, including site preparation, landscaping, erecting scaffolding or providing site access, are also liable for the reverse charge.
This is by no means an exhaustive list of qualifying supplies. If you are in any doubt about whether or not reverse charge VAT will apply to you, a full list of qualifying construction works is available here.
Potential impacts & preparation
There is real potential here for the new rules to affect cashflow within your business. That is probably the last thing you want to hear after a year of COVID-19 disruption.
To manage this effect, suppliers and customers should agree on their status and the correct VAT accounting treatment well in advance of 1 March 2021 – which doesn’t leave long.
Both VAT-registered businesses will also need to update their accounting systems to ensure the right invoicing procedures are in place. We can help you with this over the next five or so weeks.
We also offer a full Making Tax Digital-compliant VAT service. If you need any help with accounting for VAT or planning for the reverse charge, contact us on firstname.lastname@example.org or call 01363 773191.