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Following two previous delays due to the coronavirus pandemic, new rules governing how VAT registered traders within the Construction Industry Scheme account for VAT will come into force on 1st March 2021. A further postponement is highly unlikely; therefore, traders need to be preparing themselves, now, in order to be ready for the changes which will shortly be needed both on customer invoices and VAT returns.
What is the change?
The reverse charge is a way of accounting for VAT where the customer, not the supplier, accounts for the VAT. The customer receiving construction services must pay the VAT to HMRC, instead of the supplier as happens now. They still recover VAT suffered, subject to the usual rules.
John supplies services to Peter in connection with two separate jobs, the first to be invoiced on 25th February 2021, the second one week, later, on 4th March. Both jobs are for £100 + VAT.
The first job is invoiced prior to the rule change, and is accounted for in the traditional way. John sends Peter an invoice for £120 (£100 + VAT), which Peter pays. John includes £20 of output tax on his next VAT return, and pays it to HMRC. Peter includes £20 input tax suffered on his VAT return.
The second job is invoiced after the change in rules, so John applies the reverse charge. His invoice is for £100 only, but includes a statement on the invoice that the reverse charge applies, and that Peter must pay the £20 “reverse charge” VAT. Peter includes this on his VAT return, but also claims it as input tax on the VAT return in the normal way. It is therefore tax neutral.
Put simply, rather than Peter paying £20 VAT over to John, for John to then send on to HMRC, he now pays it direct to HMRC. That sum remains input tax, credited to Peter in the normal way.
When do the new rules apply?
The new rules will apply to standard rate VAT or reduced-rate construction services; they will not apply to zero-rated services. The rules only apply to payments made through the Construction Industry (CIS) scheme, to suppliers who are also VAT registered. Supplies to end users are to be dealt with in the traditional way, and where either party is not VAT registered, the ‘old rules’ still apply. The flowchart below outlines if and when the reverse charge will apply.
Where there is a ‘mixed supply’, for example where materials are supplied along with CIS labour in a single invoice, the new rules will apply to the entire supply.
When the reverse charge applies, the supplier must state on the invoice the rate and amount of VAT which would have been charged, had the supply been dealt with in the normal way, and also a note advising the customer that they are liable to make the VAT payment. There is no set wording for this, but we would suggest one of the following:-
“Reverse charge: VAT Act 1994 Section 55A applies:”, or
“Reverse charge: customer to pay the VAT to HMRC”
Other points to note
You may issue an invoice which includes both standard rate and reduced rate supplies. It will then be necessary to ‘split out’ the elements on the invoice, for example £5,000 at standard rate, then a separate line showing, say, another £5,000 at reduced rate. You cannot put a single entry down showing the “average” rate.
You may be a subcontractor on one project and a main contractor on another, if so you need to look at the VAT status of your services for each construction project you work on, separately.
The VAT status of the customer is critical to the application of the rules, so HMRC suggest that suppliers obtain and check the registration numbers of their customer. This can be done online.
If you are currently on the flat rate scheme, and the reverse charge applies to some or all of your supplies, it may well be wise to change to the Standard VAT scheme, as your ‘Flat Rate Income’ will be reduced, and you can’t recover input tax on expenses.
If you require any further assistance on any aspect of the reverse charge, or VAT advice generally, please contact your regular Brearleys contact.
Andrew Cowe, Tax Manager, Brearley & Co
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