Is your construction firm VAT registered? Are you aware of the impact that the introduction of the VAT reverse charge will have on your business finances?
Since March 1, 2021, when a VAT-registered construction business supplies a service to another VAT-registered construction business, they will need to send a VAT invoice stating that the service is subject to the domestic reverse charge.
Crucially, no VAT will be added to the invoice, but the recipient must show the VAT due on its VAT return. The recipient can then recover the VAT as input tax.
“The changes will have major implications for invoicing and cash flow throughout the construction supply chain,” says Emma Roberts from One Click Accountant.
“Sub-contractors and smaller firms use VAT payments as additional cash flow to pay for goods and materials. With no VAT being passed down the supply chain, many businesses will find themselves out of pocket.”
Applying the VAT Reverse Charge
The VAT reverse charge applies when a construction firm supplies services to other VAT-registered businesses, who then supply these to someone else, such as developer or building owner. These services are set out in the Construction Industry Scheme (CIS). Click here to see the HMRC guide.
HMRC states that businesses must apply the reverse charge when:
- The supply for VAT consists of construction services and materials
- It is made at the standard or reduced rate of VAT
- The invoice is between a UK VAT registered supplier and UK VAT registered customer
- Supplier and customer are CIS registered
- The customer intends to make an ongoing supply of services to another party
- The supplier and customer are not connected.
Agreements for when the VAT reverse charge applies should be made between the construction businesses involved, and should be included in any contracts going forward. If some services are not covered by the VAT reverse charge, they can be added if the supply includes an element of VAT reverse charge.
The VAT reverse charge applies unless:
- Services are supplied to an end client (property owner or developer)
- The recipient makes onward supplies of construction services to a connected company, which is an end client
- The recipient is not VAT registered
- The recipient is not registered for the CIS
- Supplier and recipient have a landlord and tenant relationship
- Supplies are zero-rated.
A key point is that customers must tell the supplier in writing they are the end client, otherwise the supply will come within the scope of the VAT reverse charge.
Invoices covering services that come under the VAT reverse charge must include the details on a normal VAT invoice. It must quote the VAT due, whether the VAT reverse charge applies and that the customer will account for the VAT.
“Construction companies must urgently review their current invoicing and accounting systems.”
“It can be quite confusing to calculate when the VAT reverse charge applies and we won’t be surprised if suppliers continue to wrongly account for the VAT to HMRC,” concludes Emma.
“We are particularly concerned about sub-contractors and small construction firms who might still be handling their own invoicing”Emma Roberts, One Click Accountant
The team at One Click Accountant are currently helping construction businesses to deal with the changes.
If you would like some help or have a query: