Annette Stone, Personal Tax Manager at Thomas Westcott Chartered Accountants, explains how construction firms can prepare for the introduction of the VAT domestic reverse charge for CIS construction services on 1 March.

With just weeks to go until the implementation of the controversial VAT domestic reverse charge for CIS construction services, how can firms prepare?

Identify potential cashflow issues

The reverse charge will likely impact small businesses with a loss of cashflow where VAT will no longer be charged. Businesses under the Flat Rate Scheme (FRS) are very likely to be affected by increased VAT costs. Cash accounting cannot be used for the supply of services under 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 and their VAT Return is a net claim from HMRC instead of a net payment.

Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.

Prepare to implement a new invoicing system

Suppliers will be required to issue an invoice stating that its services are subject to the reverse charge. The invoice recipient must account for the VAT on that supply via their VAT Return at the appropriate rate, instead of paying the VAT to the supplier. HMRC guidance states that an invoice should clearly show the amount of VAT due under the reverse charge, but should not be included in the amount shown as a total.

Update your accounting systems and software

You will need to ensure that your accounting systems are familiar with transactions relating to both the purchases and expenses which fall within the reverse charge mechanism. Any goods supplied in conjunction with any service supplied will also fall within the scope of the reverse charge.

Get the tax point right

For invoices issued for specified supplies spanning 1 March 2021 that become liable to the reverse charge:

  • Before 1 March 2021 – the normal VAT rules will apply and you should charge VAT at the appropriate rate on your supplies.
  • On or after 1 March 2021 – the domestic reverse charge will apply.

Check your clients’ VAT status

Before raising an invoice, carry out checks to ensure your building contractor clients are properly VAT registered.

For transactions that fall within the scheme:

  • No VAT is added to the sales figure invoiced to the contractor.
  • The invoice has to mention that the reverse charge applies and must specify the VAT that the onward customer should process in their return.
  • The amount of VAT due should be clearly shown on the invoice but should not be included in the amount shown as total VAT charged.
  • If you receive an invoice for payment that mentions the reverse charge, the output tax must be accounted for as VAT due on sales and reclaimed as VAT reclaimed on purchases.

Notify your subcontractors, contractors and identify your end-users

Suppliers should identify customers who will be liable for the reverse charge by checking VAT registration numbers and obtaining end-user evidence to ensure VAT is accounted for correctly.

Be aware of the exemptions

The exceptions to any services that will not fall into the scope of the reverse charge are:

  • If the supplies made are zero-rated.
  • If you are supplying services to an end-user. For example, when your customer is selling a newly completed building, rather than selling services on as part of their business operation which is providing building or construction services.
  • The services supplied are then onward supplied to a connected company.

If you believe that your business will be affected with the introduction of the new reverse charge for construction and require further information, please do not hesitate contact the Thomas Westcott tax team.

Annette Stone and fellow Thomas Westcott tax specialist Sean Bolter will be speaking about the new reverse charge for construction at a Thomas Westcott webinar and Q&A on Thursday 11 February 2021. Sign up for this FREE event.