Are you a contractor or a subcontractor in the construction industry? You should be starting to think about the new VAT regime which comes into effect in March 2021.
What's it all about?
In a nutshell, from March 2021, if you are making payments for construction works and the new VAT regime applies, you don't pay VAT to the subcontractor – you pay it to HMRC. If you are a subcontractor receiving payments, you may only receive the net of VAT amount, which will affect your cash flow.
When does it start?
The introduction of the new rules has been postponed twice, and is now scheduled for March 2021. There are no indications that the start date will be postponed again.
Pre-March 2021 contracts are caught
The new regime doesn’t just apply to contracts entered into after March 2021 – it also applies to existing contracts that have already been entered into. So the VAT treatment will change part way through an existing contract.
Revised wording in contracts may be necessary
Most standard drafting does not take the new VAT regime into account, so consideration should be given to including new provisions to deal with the new arrangements.
End users are not affected but have to notify the supplier/building contractor
The new rules don’t apply if you are an 'end user' – i.e. you are not making any onward supply of the property or the construction services, for example if you are paying for a building to be constructed to occupy or let out. Companies connected to end users are also treated like end users. End users have to notify the supplier or building contractor either in the contract or separately. HMRC suggests the following wording:-
We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.
Invoices must refer to the reverse charge
If the reverse charge applies, the invoice has to say so. No VAT is charged on the invoice, but the invoice must refer to the reverse charge and show how much VAT is due under it. Wording such as "Reverse charge: VAT Act 1994 Section 55A applies", "Reverse charge: S.55A VATA 94 applies" or "Reverse charge: Customer to pay the VAT to HMRC" should be included.
CIS registration and VAT registration
The reverse charge only applies if both parties are registered under the CIS, both parties are VAT registered, and VAT is chargeable on the supply.
Materials are included, not just labour
CIS deductions apply to the labour element of invoices and the material element is excluded. But the VAT reverse charge applies to the material element as well.
Subcontractors should consider changing to monthly VAT returns
Since they will not receive VAT on payments which have to be paid to HMRC, subcontractors are likely to move into a VAT repayment situation, and should consider changing to monthly VAT returns to get VAT repayments more quickly.
HMRC has published guidance and has also produced a VAT Reverse Charge Technical Guide.
Contributors
Director of Corporate Tax
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