From 1st March 2021, new VAT accounting procedures for the construction become more complex, adding a further layer of compliance onto building contractors. Planning ahead is essential.
New rules are being introduced on 1st March 2021 (delayed due to Covid and Brexit) which affect VAT registered construction businesses that supply or receive specified services that are reported under the Construction Industry Scheme (CIS), and undertake the following:
- Buy in construction services from other builders and make an onward supply of those services to another customer. For example, where a subcontractor invoices the main contractor on a project, and the main contractor invoices the final “end-user” client.
- Sells construction services to other builders where the builders make an onward supply of the services to their customer.
If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
Under current rules a builder charges VAT to their customer; collects the VAT from the customer; and accounts for this in Box 1 on their relevant VAT return. This procedure is changing for supplies between VAT registered builders caught by the new rules.
From 1st March 2021 if the new rules apply the builder will now invoice their builder customer without charging VAT, and the customer instead will make the Box 1 entry on their own VAT return.
There will be no cash flow issue for the builder receiving the services because the same amount of VAT declared in Box 1 will also be included as input tax in Box 4 (subject to partial exemption issues). This is known as a “reverse charge” procedure.
Which sales are caught by the new rules?
The new reverse charge procedures will apply to the following transactions:
- The legislation refers to “specified services”, but these do not apply to services supplied to non-construction businesses, such as a retailer having their premises improved or a private homeowner wanting an extension built. So, if construction businesses are providing their services to a non-building contractor end customer, the new rules won’t apply.
- The reverse charge will also apply to any goods supplied by the builder as part of their work.
- The reverse charge is based on the rate of VAT that applies for the work in question, but only supplies subject to either 5% or 20% VAT (based on current rates). Zero-rated sales are excluded.
The new procedures are best illustrated by way of an example:
Bob is a VAT registered sole trader electrician. He is doing some work on an office block, invoicing the main building contractor (Bill) for his work.
Bill is also VAT registered, and will invoice the building owner. Bill is not an “end-user” because he is making an onward supply of construction services to his own customer. He is an “intermediary supplier”.
The invoice raised by Bob will be subject to the new procedures (i. e. no VAT is charged). If the value of Bob’s work including materials is £5,000:
Bob’s VAT return will only include the value of the sale in Box 6 (outputs) of his VAT return:
Bill will undertake the reverse charge calculation on his own VAT return and make the following entries on his return:
- Box 1 – output tax £1,000 (ie £5,000 x 20%).
- Box 4 – input tax - £1,000 (same figure as Box 1 – providing no partial exemption issues).
- Box 7 – inputs - £5,000 (net value of payment made to Bob).
Other issues to consider:
Taking the above example a stage further, they each have their own responsibilities under the new rules.
Bob must ensure that Bill is both registered for the Construction Industry Scheme (CIS) and also has a valid VAT number.
Bob must also specify on his sales invoices the amount and rate of VAT that Bill must declare through the reverse charge (i. e. 5% or 20% VAT).
Bob should include wording on the sales invoice along the lines of:
“Reverse charge: Customer to pay the VAT to HMRC.”
Bill must tell Bob if he is an “end-user” or “intermediary supplier”. If he is an intermediary supplier, then Bob will not charge him VAT because the reverse charge applies.
Here are a few other points to consider:
- HMRC suggests that if there are any doubts about the credentials of a builder customer, then a deposit equal to the amount of VAT not being charged should be collected from the customer (e.g. if they have applied for but not received a VAT number).
- VAT Notice 735 mentioned above gives examples of customer checks that should be considered at para 9.3.1.
What You Should do to Prepare for the Change:
You should undertake the following procedures in advance of the 1st March 2021 implementation date:
- Make sure accounting systems and software are updated to deal with the reverse charge.
- Consider whether the change will have an impact on cashflow (see below).
- Ensure all staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.
- Cash accounting cannot be used for the reverse charge.
- As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders. Repayment traders can apply to move to monthly returns to speed up payments due from HMRC to assist with cashflow.
- Contractors will need to review all contracts with sub-contractors to decide if the reverse charge will apply to the services they receive under their contracts. They’ll need to notify suppliers if it will.
- Sub-contractors will need to contact their customers to get confirmation from them if the reverse charge will apply, including confirmation if the customer is an end user or intermediary supplier.
What Services are Within the New Rules:
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services.
- Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours.
- Pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
- Painting or decorating the inside or the external surfaces of any building or structure.
- Services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
Services Excluded from the New Rules:
- Drilling for, or extracting, oil or natural gas.
- Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose.
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
- Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
- The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
- Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic.
- Signwriting and erecting, installing and repairing signboards and advertisements.
- Installing seating, blinds and shutters.
- Installing security systems, including burglar alarms, closed circuit television and public address systems.
Services with Reverse Charge and Non-reverse Charge Elements:
If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.
Supply and fix works will be subject to the reverse charge. For example, a joiner constructing a staircase offsite then installing it onsite is making a reverse charge service, even if the charge for installation is only a minor element of the overall charge.
Penalties Issued By HMRC For Errors:
HMRC have stated in their guidance that they will take a light touch approach to any errors within the first six months of the new scheme.
How Hallidays can help
The new rules coming into force on 1st March 2021 are both onerous and potentially complex, adding a further layer of compliance onto building contractors. It will be essential to plan ahead for the new rules so any changes can be implemented in good time. If you need further support with the new VAT reverse charge rules, speak to our specialist Tax team on 0161 476 8276, email email@example.com or visit https://www.hallidays.co.uk/services/taxation to learn more about how we can help.
The information contained herein is of a general nature and is not intended to be received as formal professional advice. Whilst we endeavour to provide accurate information, there can be no guarantee that the information is accurate as of the date it is received, or that it will continue to be accurate in the future, due to legislative changes. It is therefore important that before you act upon any information contained herein you seek appropriate professional advice to take account of your exact circumstances.