Client advice

Major VAT Changes for Construction Businesses

A major change to the way in which businesses in the building and construction sector collect VAT will come into effect on 1 March 2021.

This change could have a significant detrimental impact on short term cash flow as, in short, the customer who is receiving the service will retain the VAT that they would have otherwise paid to the supplier and pay it directly to HMRC instead.

This change marks a fundamental change in the way that VAT is accounted for and was due to be introduced in October 2020 but has been delayed due to coronavirus (COVID-19).

It is called the Domestic Reverse VAT Charge for Building and Construction Services and applies to services delivered under the Construction Industry Scheme (CIS).  An important aspect to note, however, is that unlike CIS the new VAT rules also apply to any goods that are supplied alongside CIS services.

For many businesses, the VAT that they receive from customers is often used as a source of working capital before being paid over to HMRC but from March next year that source will disappear.

Example:

  • Current rules:  Invoice issued to contractor for £5,000 plus VAT (£4,000 labour, £1,000 materials.  Amount received – £5,200 (after CIS – assumed as 20%).
  • New rules: Invoice issued to contractor for £5,000 plus VAT (£4,000 labour, £1,000 materials.  Amount received – £4,200 (after CIS – assumed as 20%) .

Who is affected?

  • Any business that is registered for VAT and that supplies services specified under CIS to other VAT registered businesses.  
  • Broadly this includes construction, painting, decorating, renovation, demolition, heating/ventilation and air conditioning.
  • HMRC provides a full list of services that are included or exempt from CIS here.

How does it work?

From 1 March 2021 suppliers and subcontractors in the building and construction sector will no longer be required to charge their main contractor VAT

Instead, the main contractor will charge themselves VAT and pay this across to HMRC.  The suppliers and subcontractors will need to raise a new type of invoice, called a domestic reverse charge VAT invoice which must include specific wording.

What do you need to do?

CIS contractors should start thinking about the impact that the new rules could have on their business and forecast the short term cash shortfall that they will need to manage.

  1. Review your existing processes:  You need to ensure that your system and process is able to correctly send both VAT invoices and reverse charge VAT invoices.  Also consider the potential benefits of providing materials separately from CIS services;
  2. Plan for the cash flow hit: You need to assess how much VAT you will no longer receive and plan for the impact;
  3. Review your contractor relationships: Which of the contractors that you work with are at the end of the supply chain;
  4. Consider whether moving from cash accounting to invoice accounting for VAT would be beneficial;
  5. Talk to us – we have over ten years experience of working with CIS as well as businesses outside of construction that are subject to specific VAT schemes.

For help with this or any other accounting, taxation or financial need contact ATN on 01474 326224. Alternatively, visit the website;  tweet @atnpartnership or email  info@atnpartnership.co.uk.

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