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VAT reverse charge on building and construction services

VAT reverse charge on building and construction services

Are you a VAT registered contractor/subcontractor who is providing services under the Construction Industry Scheme? If yes, you must ensure you comply with the new VAT rules coming into force from 1 March 2021.

Get ready for the change

Before this change comes into effect, please make sure your accounting software is up to date. This will enable you to process and submit VAT returns correctly.

Impact on contractors

As a contractor you will need to pay your subcontractors VAT to HMRC by applying a VAT reverse charge unless you are defined as an ‘End User’.

End Users are businesses, or groups of businesses that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.

Before this change comes into force, please ensure you confirm to your subcontractors whether you are an End User or not. If they do not receive confirmation of your status, reverse charges will apply.

Please note that you cannot use cash accounting on any services that are subject to a reverse charge.

Impact on subcontractors

Unless your contractor confirmed that you provide services to them as an “End User”, you will no longer charge VAT on your invoices to your contractor and reverse charges will apply.

By applying a VAT reverse charge on your invoices, VAT which would be payable by you to HMRC will still be due but it will be paid by your contractor instead.

You need to contact all your contractors and ask whether they are End Users or not to ensure correct VAT treatment on your sales invoices. This will be an ongoing process and contractors’ status will need to be considered on a project by project basis.

If you are a subcontractor who mainly provides services to contractors who are not “End Users”, the implementation of reverse charges could have a considerable impact on the cash flow of your business. We would advise you to consider changing your VAT frequency to monthly returns to reduce this impact.

Subcontractors who are operating a flat rate VAT scheme will no longer be able to apply a flat rate to any services which are subject to reverse charges and might want to consider leaving this scheme.

Please do not hesitate to contact us if you have any questions. We can give you guidance on how to issue your invoices and how to correctly prepare and submit your VAT returns.

Additional information

For more details about VAT reverse charges in the construction industry please see the link below:

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide

HMRC has produced flowcharts to guide customers and suppliers when invoices are to be issued. Please see the links below:

VAT domestic reverse charge for building and construction services PDF

Customer flow chart PDF

If you would like any further information. Then please get in touch with the office.