Individuals operating in the Construction Industry need to be aware that from the 1st March 2021 there will be a change in how VAT will be handled. Originally these changes were due to start in October 2019, but they were delayed initially due to Brexit and then subsequently by the Coronavirus pandemic.
The VAT domestic reverse charges for the construction services is, in essence, an extension to the Construction Industry Scheme (CIS). It will apply to any business transactions between VAT registered contractors and sub-contractors that have to be submitted under CIS.
Reverse charges will apply when:
- VAT is charged in regard to construction services and materials
- VAT is paid at a standard or reduced rate
- A UK project is initiated between a VAT registered supplier and a VAT registered customer
- Both the supplier and customer are registered for CIS
- Neither the supplier nor the customer is connected in any way
According to the HMRC, they have introduced this initiative to help combat fraud. There have been many cases where construction businesses charge VAT and then decide to stop trading which ultimately means that they take with them between 5% to 20% of additional profit due to the VAT that they have charged.
Ultimately, as with any change of this nature, a business will need to make some significant changes:
- Staff will need extra training to recognise CIS projects
- All accountancy and bookkeeping practices will need to be updated to account for the changes in invoicing and reporting obligations
- The VAT Flat Rate Scheme can no longer be utilised
- No cash payments can be accepted
- The cashflow needs of a business will change and consideration might be needed to file monthly returns
In summary, the construction activities that VAT reverse charges apply to are:
- A building or structure project that has some form of construction work which includes alterations, repairs, extensions or even demolition
- Any work on a piece of land that includes construction activities for walls, power lines, electrics, water, pipelines and sewers
- The installation of lighting, heating, air conditioning, power supplies, drainage, water supply and fire protection
- Painting and decorating of any internal or external surfaces of a building
Should you have any questions or need any further information in regards to the VAT reverse charge scheme please call us on 01173 700 079 or e-mail email@example.com.