On 1 March 2021, businesses within the Construction Industry Scheme (CIS) must record, report and pay VAT under the new VAT domestic reverse charge rules.
A lot has already been written on this subject – a lot of it complex – and yet it is important that businesses that work within the construction and property sector understand how this change affects them in practice.
In its simplest form, the new regime will make it the responsibility of businesses supplying construction services to account and charge for VAT on services within the CIS, a task which would have previously been handled by their sub-contractors.
At the end of the supply chain, for reverse charge purposes, are consumers and final customers, who are referred to as end-users.
This includes businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.
The reverse charge does not apply to supplies to end-users where they inform a supplier or building contractor of their status.
HM Revenue & Customs (HMRC) has also defined a list of construction services as within the new reverse charge regime, which can be found here.
Where a mixed supply is made containing a reverse charge and normal supplies then a business should apply the reverse charge to the entire supply.
Businesses will need to make changes to invoicing and accounting procedures to take the reverse charge into account, but this may differ depending on whether they are a contractor or sub-contractor.
Determining when the switch to the new VAT regime takes place depends on the tax point i.e. the date of issue of the VAT invoice or the receipt of payment.
Where the tax point is on or after 1 March 2021 then the reverse charge should be applied even for work commenced before this date. Otherwise, the existing VAT rules apply.
These new rules are mandatory – you cannot opt-in or opt-out, or only apply it to certain invoices.
The VAT reverse charge is likely to have a significant impact on the construction industry and the individual businesses within it, which is why they must seek help now. In particular, some contractors may see their cash flow adversely affected by the new rules.
This is because they may have had the advantage of being able to recover the VAT charged to them by contractors before they had to charge VAT to their customers. This may mean that they need to seek additional funding for specific projects.
Businesses supplying construction services may also face additional complexity as they will have the responsibility of determining the correct VAT treatment for their sub-contractor’s supplies. Indeed, they will need to determine those instances when the reverse charge applies and those where it will not.
For these reasons those operating in the property and construction sectors must seek help now and start communicating with their customers and suppliers to understand how the scheme applies to the entire supply chain.