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HMRC have introduced new VAT legislation on the construction industry. This may be news to you, but the Domestic Reverse charge came into effect in the UK as of the 1st of March 2021. This was originally scheduled to be in place in October 2019, but was delayed on two occasions due to Brexit and Coronavirus implications.
The Domestic Reverse Charge (DRC) is an updated way of accounting for your VAT, and will apply to all VAT registered construction businesses in the UK. In simple terms, this change moves the liability of VAT from the supplier of the service (subcontractor) to the customer (the contractor).
So, what is the purpose of this? The new legislation is mainly in place as an anti-fraud mechanism which has been designed to reduce the likelihood of any sophisticated criminal attacks on the UK VAT system. The main instances of fraud here are where companies receive high net amounts of VAT from their customers, but have no intention of paying the VAT on to HMRC, this is called “missing trader” fraud.
It is essential to fully understand how this new legislation could impact your construction business, as well as any current business processes you have in place. As always, it is wise to consult anything you are not entirely clear on with a qualified and experienced accountant. However, the below guide should provide some insight into this new VAT setup.
Domestic Reverse Charge Exemptions
Firstly, there are some exemptions to the DRC, and if you apply to anything on the below list, you will not need to comply:
Supplies of VAT exempt building and construction services
Supplies that are not covered by the CIS, unless linked to such a supply
Supplies or staff or workers
In addition, the DRC does not apply to taxable supplies made to the following customers:
Non-VAT Registered Customer
‘End Users’ - For example, a VAT registered company who is not intending to make further on-going supplies of construction
‘Intermediary Suppliers’ - For example, a landlord and his tenant, or two companies within the same group structure
Overseas customers - This ruling only applies to registered UK companies providing construction services within the UK.
How does the Domestic Reverse Charge Impact You?
If you are a VAT-registered business and act as a supplier who provides building and construction services to a VAT-registered customer who is CIS-registered, then you will no longer need to account for any VAT expenses. Instead, you should be changing your invoices to inform your customer that the VAT reverse charge has been applied, and that they are responsible for the VAT using the reverse charge procedure.
Conversely, if you are a VAT-registered customer you will now need to account for both input and output VAT on your invoices that you receive from VAT-registered suppliers.
In summary, the differences are as follows:
Before the VAT rules came into place:
A builder provides services and building materials to a customer (eg construction firm). Under the rules at the time, the builder must charge for VAT and declare the VAT to HMRC through their VAT return.
After the new VAT accounting rules came into place:
The builder supplies services to a construction firm. The construction firm must now declare the VAT due on their VAT return, and then reclaim it subject to normal rules.
How to Prepare
The Domestic Reverse Charge is now mandatory, therefore it is essential that your business springs into action and becomes prepared to implement this change. Here are three ways you can prepare:
Consider your Cash Flow
It is important to consider whether the change in ruling will majorly impact your cash flow. If you are a subcontractor, then it is likely that your cash flow will be impacted, as you will no longer be receiving a VAT addition from your customers. Therefore, you are likely to see a noticeable change in your inflowing cash.
Conversely, if you are a contractor, you are likely to receive short term cash flow benefits from this new ruling, as you will no longer be paying the VAT to your subcontractors. However, as a contractor, you must account for the VAT as output tax as well as input tax along with your VAT accounting.
If you are not clear on how the new rules may impact your cash flow, then please reach out to your accountant, who will be able to explain your specific scenario to you.
Communicate changes with your staff, contractors and customers
In order to effectively implement these new changes, it is essential that any staff who interact with the VAT accounting process are fully aware of how this new change will work in practice.
It would also be prudent to contact any subcontractors/contractors you have to make sure they are aware of the change, so that all invoices are correct by both parties going forward.
Ensure all accounting software can handle the change
On the assumption that you are using a dedicated accounting software, you should check whether it can deal with the new domestic reverse charge. For example, a desktop software platform will need to be able to cater for the change in VAT requirements. If not, then contact your accounting software provider to query whether this change will be implemented.
Domestic Reverse Charge Checklist
Here is an easy to read checklist, to make sure that you are ready to correctly apply the domestic reverse charge:
You and your staff fully understand the new VAT rules for your building and construction services business. You also understand when it should be applied, and when it is not to be applied.
You have checked and confirmed that your accounting software can handle the update
You have considered the risks and impact of the potential cash flow changes, and made adaptations to make sure this cash flow change will not negatively impact the business.
You have contacted your customers and/or suppliers and informed them of the new ruling, so they are aware of any changes to ongoing invoices
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