Domestic VAT Reverse Charge - Update
Posted on 17th February 2021 at 13:51
What is the Domestic VAT Reverse Charge?
As from the 1st March 2021, the domestic VAT reverse charge must be used for most supplies of building and construction services. The charge applies to standard and reduced-rate VAT services: For individuals or businesses who are registered for VAT in the UK For those reported within the Construction Industry Scheme (CIS)
Q. Why is it being introduced? The domestic VAT reverse charge procedure is an anti-fraud measure designed to counter sophisticated criminal attacks on the UK VAT system. The intention is to cut down on “missing trader” fraud, where companies receive high net amounts of VAT from their customers, but they have no intention of paying the VAT to HMRC.Click on this text to edit it.
Q. Who will it affect? It will affect VAT registered construction businesses who supply or receive construction and building services that are reported under the Construction Industry Scheme (CIS) * It will mean the customer (the contractor) will be responsible for the VAT. Q. What does it mean for you? CIS Sub-Contractor - You will no longer charge VAT to your CIS customers. Instead, on your invoices you will need to state that your customer is responsible for the VAT and show what VAT rate should be applied. CIS Contractor - When you receive a bill from your CIS sub-contractor, then you are responsible for reporting both the input and output VAT on that bill.
When you must use the Reverse Charge: If you sell building and construction services, then the reverse charge will need to be applied when: Your customer is registered for VAT in the UK Payment for the supply is reported within the Construction Industry Scheme (CIS) The services you supply are standard or reduced rated You are not an employment business supplying either staff / workers, or both Your customer has not given written confirmation that they are an end user or an intermediary supplier Suppliers flow chart link: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878587/Annex_1_-_VAT_domestic_reverse_charge_for_building_and_construction_services.pdf If you buy building and construction services, then the reverse charge will need to be applied when: Payment for the supply is reported within the Construction Industry Scheme (CIS) The supply is standard or reduced rated You are not hiring either staff / workers, or both You are not using the end user or intermediary exclusions Buyers flow chart link: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878594/20.01.15_annexe_2_customer_flowchart.pdf
How to prepare: Make sure your accounting systems / software can deal with the reverse charge Consider whether the change will impact your cash flow Ensure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work * If the VAT reverse charge does not apply then you should follow the normal VAT rules What you will need to do to prepare: Seller: Check if your customer has a valid VAT number Check your customer’s CIS registration Review your contracts to decide if the reverse charge will apply, and advise your customers Ask your customer to confirm whether they are an end user or intermediary supplier How to record the reverse charge: Once accounting systems and software are confirmed to account and record the reverse charge, you will need to make sure invoices show the reverse charge applies, so that customers no longer pay any VAT over to you. Buyer: Check if your supplier has a valid VAT number Advise your supplier if you are an end user or intermediary supplier, as the reverse charge will not apply How to record the reverse charge: Once accounting systems and software are confirmed to account and record for the reverse charge, you will need to make sure the invoice you receive is correct and record the reverse charge on your VAT return and reclaim it in the usual way. https://www.gov.uk/reclaim-vat * You will also need to check the list of services that must use the VAT reverse charge https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse
You can check a customers Construction Industry Scheme registration, by visiting:
https://www.gov.uk/use-construction-industry-scheme-online
* NOTE - Customers who are contractors for CIS purposes, may not show up on these checks. If this is the case, ask for confirmation as to whether they are end users or intermediary suppliers, and ask them to confirm that they are reporting under CIS before applying the reverse charge.
** The following information will be required to complete the checks:
Sole trader:
Name
Unique taxpayer reference
National Insurance number
Partnership:
Partnership name
Partner’s name
Partnerships unique taxpayer reference
Partner’s unique taxpayer reference, or National Insurance number – If the partner is an individual
Companies unique taxpayer reference or registration number – if the partnership is a company
Company:
Name of company
Unique taxpayer reference for the Company
Company registration number
For more information, help and guidance (including terminology and exclusions), please click on the link below to access the technical guide:
https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#end-users-and-intermediary-supplier-businesses
Sub-Contractor - What does the VAT reverse charge for construction services mean for you?
If you supply CIS-regulated construction services then in theory, it will mean little because when you issue your VAT invoice, you will merely be passing on the VAT charge that you would have had to account for in any event.
However, you will need to expect a change to the way your reconcile customers payments against invoices issued, as any VAT registered customers will be withholding the VAT element for any CIS related supplies. * This may therefore require an update to accounting software, if cloud software is not used.
It is also likely to affect cash flow because the VAT previously held, before passing it monthly/quarterly to HMRC (as a payment), will no longer be available for you to use as before. * This is important because as you will no longer pay VAT on your sales, you might find you become what HMRC deems as a 'repayment trader', which ultimately is a business whose VAT return means they claim money from HMRC, rather than making a payment. ** HMRC have suggested those such businesses apply to move to monthly returns, to speed up payments being received from HMRC, and to therefore benefit cash flow.
Accounting Systems - Automation:
Software can help to automatically calculate the input and output tax on items that the domestic VAT reverse charge applies to, when entering bills and automatically show the items that are subject to the reverse charge, and when the VAT rate that applies, and informs the customer they must account for the VAT.
We recognise this as a complex area, and therefore we will be looking to hold a webinar on this subject, covering areas including:
the engagement structure, transition period, and how to account for the VAT change.
To register, please click on the button below:
Disclaimer:
Whilst every effort in ensuring the accuracy of the content of these notes has been considered, we cannot be held responsible in any way in regards to any consequences and/or decisions arising from the information provided. For specialist advice tailored to your individual circumstances - please seek professional advice.
Tagged as: Construction Industry Scheme (CIS)
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