Despite being delayed on two occasions, HMRC’s Domestic Reverse Charge for Building and Construction Services (VAT Reverse Charge) starts in the Spring of 2021.
This means that the construction sector has another change to grapple with, against the already uniquely challenging Covid-19 backdrop.
The VAT Reverse Charge is to help combat organised crime groups operating within the construction industry. We all know what these criminals do – charge VAT and never account to HMRC for it. However, moving the obligation to pay VAT to HMRC up the supply chain impacts on the cashflow of contractors and subcontractors.
Who is affected by these changes,and when?
Contractors and subcontractors who are registered for the purposes of the Construction Industry Scheme (CIS) and receive building and construction services from others will be required to pay those others net of VAT and account for the VAT to HMRC.
The VAT Reverse Charge comes into effect on 1st March 2021 and will be ‘triggered’ at the ‘tax point’. This is the earlier of issue of a VAT invoice or receipt of payment after that date.
Who is not affected by these changes?
These changes do not apply to end-users or to entities that are not VAT registered in the UK. For them, the treatment of VAT will continue as before.
An end-user is a taxable person who receives building and construction services but does not go on to make a further supply. Examples are a property developer, a final user and an occupier of a building.
HMRC has produced flowcharts to help businesses receiving construction and building services check whether normal VAT rules or the VAT Reverse Charge apply. The flowcharts may be accessed here.
What should I do?
Practical steps to be taken include planning for reduced cashflow, liaising with accountants, and with entities up and down the supply chain to decide whether the VAT Reverse Charge will apply in each case and ensuring that any accounting/invoice software reflects the changes.
As far as contracts are concerned, whatever the contractual terms about payment of VAT, the parties must comply with the law. We have seen some minimal revisions to the JCT forms and will be pleased to discuss contractual implications.
End-users must ensure that they inform suppliers in writing of their end-user status.
How does HMRC propose to enforce these changes?
HMRC proposes light-touch enforcement for the first 6 months, provided mistakes are made in good faith with a genuine attempt to comply with VAT Reverse Charge. The full HMRC guidance can be found here.
For an informal discussion of the VAT Reverse Charge or any other construction issue, please contact Jan Grimshaw on 07702 846850 or Sean Randall on 07984 979 349.
Please note that Davies and Partners Solicitors does not provide tax advice.
Kerry Dyer- Trainee Solicitor, Construction Law