Following a postponement due to Coronavirus, HMRC are continuing to implement the VAT Domestic Reverse Charge with effect from 1 March 2021.
This sounds complex but…….
The aim of this legislation or charge is to tackle VAT fraud in the construction industry which costs the UK economy approximately £100million per annum, specifically missing trader fraud, by making it the responsibility of the contractor or receiving sub-contractor to account to HMRC for VAT on applicable transactions.
This sounds complex but broadly means, a contractor will no longer pay VAT over to their sub-contractor and will instead pay it directly to HMRC via their own VAT return.
The first two points of this charge is what it applies to;
- If an invoice is for services that fall within the Construction Industry Scheme (CIS) (both labour and materials) then the reverse charge will apply.
- The change only applies to individuals or businesses that are registered for VAT in the UK – it will not apply to end users, consumers (individuals), if the service is zero rated or if a sub-contractor is not registered for VAT
What do I need to do?
Contractors (unless you are the end user) will need to notify their VAT registered subcontractors that the reverse charge applies to all services unless the contract is zero rated. We attach an example of a letter to send to all subcontractors.
Subcontractors that are VAT registered will need to obtain the VAT number of their contractor as this will be required to verify that the VAT number is valid and for including on reverse charge invoices.
How do I invoice and get paid ?
Where you charged VAT previously, you will no longer need to include the VAT amount payable on your sales invoice.
However, you are still required to state how much VAT is due under the reverse charge or the rate of VAT if the VAT amount cannot be shown.
The main point is that where the reverse charge applies you must note this on your invoice and that the customer is required to account for the VAT
Fortunately, for anyone invoicing from Xero, Sage etc software, this is already available within the software ready for invoices after 1 March 2020.
When invoices are issued under the reverse charge, your contractor will not pay you VAT and you do not need to pay the VAT on this invoice to HMRC which whilst this could affect cash flow short term, in the main it will save the burden of collecting VAT to then pay at the end of a VAT period.
Where the reverse charge applies payments to your subcontractors will not include any VAT but you will account for this in your VAT return. When this occurs you will reclaim the VAT that would have been charged.
This may seem strange as the net effect of you accounting for the subcontractors VAT and then reclaiming it is nil, but as noted this system is to combat VAT fraud in the construction industry.
Again, most if not all software providers have prepared and updated their systems for this and will remove many of the burdens of this reverse charge.
The reverse charge only applies to standard (20%) or reduced rate (5%) supplies, Zero rated supplies (0%) are unaffected.
Check their status
The status of the subcontractors should be reviewed periodically to ensure that are still deemed to be self employed and not employees.
HMRC have a self employment checker tool https://www.tax.service.gov.uk/check-employment-status-for-tax/who-are-you which asks a number of questions about a subcontractor (no names or personal information are required)and is useful to give some indication as to what HMRC would deem the status of an individual to be.
Supply chains and due diligence
HMRC have begun to attack the construction industry in respect of labour supply chains and due diligence that should be carried out. The consequences of not carrying sufficient due diligence can be very significant and costly for businesses. This can include corporate prosecutions, heavy penalties and becoming responsible for the taxes of others.
Please see below link to HMRC’s guidance on supply chain due diligence for your reference.
For companies that hold Gross CIS status, remember that this is under constant review from HMRC who reserve the right to remove the Gross CIS status for any non-compliance, in any tax by the company or its directors and may include;
- Late submission of personal tax returns – Remember any tax return filed after 31 January 2021 was technically late, just not penalised.
- Late payment of personal tax
- Late submission and payment of VAT return
- Late submission and payment of PAYE
- Late on non-submission of P11d (benefits in kind) where these are due.
Loss of the Gross CIS status has a major cashflow impact and should be avoided wherever possible, unless there is a clear strategy in place to mitigate the cashflow effects.
VAT registration applications
Companies wishing to become VAT registered, including subsidiaries of existing companies will find delays in the application process and a higher level of scrutiny if they operate in the construction sector. Due to the amount of ongoing VAT fraud in the sector, HMRC make additional checks into the background of the applicants and may request further information as proof of trading such as confirmed orders, submitted planning consents and initial bank account transactions.
We would advise allowing at least six weeks to obtain a VAT number when operating in the construction sector.
If you are affected by these changes or having any questions regarding any of the above hone as always, please feel free to get in touch, we’re here to help!