The New VAT Rules for Construction Sector Start on 1 March 2021
New VAT rules are due to come into effect this March which will impact on accounting for VAT for transactions in the construction sector. The new rules
are called “the domestic reverse charge for supplies of building and construction services”.
The new “reverse charge” system of VAT accounting will affect sub-contractors supplying their services to other contractors in the construction sector.
Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced
in the normal way. Under the new reverse charge system, the sub-contractor will not charge VAT on their invoice to the contractor for whom they are
working and will not account for output VAT, although they will identify the rate and amount of VAT due and notify their customer that the VAT must
be accounted for by them on their VAT return. The sub-contractor will then be paid only the net value of the work done without the VAT.
The contractor receiving supplies from the sub-contractor will be obliged to enter the VAT identified on their sub-contractor’s invoice in box 1 of their
VAT return as well as claiming this back in box 4 of the return.
This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors, some of whom were allegedly fraudulent businesses not paying
over the VAT charged to HMRC.
The new reverse charge will apply to a wide range of services in the building trade, primarily those activities covered by the construction industry (CIS)
payment rules. Note that normal VAT invoices will continue to be issued to domestic customers and other “end users” as defined under the scheme.
SERVICES TO WHICH THE REVERSE CHARGE APPLIES
You must use the reverse charge for the following services:
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services.
- Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
- Painting or decorating the inside or the external surfaces of any building or structure.
- Services which form an integral part of or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
You cannot use the reverse charge for the following services, when supplied on their own:
- Drilling for, or extracting, oil or natural gas.
- Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose.
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
- Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
- The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
- Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements.
- Installing seating, blinds and shutters.
- Installing security systems, including burglar alarms, closed circuit television and public address systems.
HOW TO PREPARE FOR CHANGES
It is important to make sure your accounting systems and software can deal with the reverse charge. You should also consider whether the change will impact
your cash flow and most importantly - make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how
it will work.
If you are a sub-contractor you should also be aware that your customers will no longer be paying you VAT, which will reduce the gross value of payments
coming into your business. So you should consider and plan for the impact of this on your day-to-day cash flow. Please talk to us about projecting
your cash flow forward so you can manage the change.
If you are a sub-contractor using the VAT flat rate scheme, it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses
from 1 March 2021.
If you want to know more about how the VAT reverse charge interacts with self-billing and authenticated receipts please contact us.
If you are likely to be affected by these changes, we can work with you to ensure you are ready for the new system when it starts. We are cloud accounting
specialists and can recommend the right software to ensure you comply with the new rules and advise on other changes to help you and your business.
direct dial: 01942 292546
mobile: 07484 271884