VAT registered businesses working within the construction sector should be aware that new domestic reverse charge VAT administration rules are being introduced wef 1 March 2021 (delayed from original October 2019 launch date).
The Government announced in the 2018 Budget that they are trying to reduce missing trader fraud; where builders collect VAT from their customers but then do not pay it over to HMRC. To prevent this, in certain circumstances (see below), the recipient of these services, where they intend to make an onward supply, will now be required to pay the VAT element of the invoice they would normally pay to the supplier direct, to HMRC instead, on their next VAT Return (this is called the ‘Domestic Reverse Charge’). On this return, the recipient will also then reclaim this VAT in the usual way. This will result in extra administration for both sides of the transaction, strained cash flow for the supplier and possibly strained cash flow for the recipient.
These rules will apply to all B2B construction services, (per CIS definition) except:
- Where services are supplied to the end user, such as the property owner, or directly to a main contractor that sells a newly completed building to the customer,
- Where the recipient and supplier are connected,
- The supplier and recipient are landlord and tenant or vice versa,
- Zero rated services (eg new build residential).
Those businesses that will be affected will therefore need to now prepare by amending their procedural, invoicing and accounting systems, including:
Recipient of Services (Main Contractor)
- It will be necessary for the recipient of services to disclose to their supplier whether or not they are the end user in the supply chain (this should be in written form and retained for future reference). This information could, in some cases, be commercially sensitive.
- Where they are not the end user, they will now be responsible for accounting for the domestic VAT reverse charge. In practical terms, to automate the VAT accounting they should enter this purchase invoice on their (up to date version) accounting software as follows:
- Sage50: the supplier invoice (which should now be received with no VAT added) should be entered onto the accounting system using the T21 VAT code for standard rated work and T26 for reduced rate work (Sage DRC Webinar Handout).
- Xero: it will be important to toggle on the new tax rates by navigating to Settings > Advanced Settings > Tax Rates and clicking the Add Domestic Reverse Charge Tax Rates. This will then add in standard and reduced rate Domestic Reverse Charge codes for both income and expenses which can be used appropriately when adding transactions to Xero going forward.
- Quickbooks: users will need to activate the new VAT codes by navigating to Taxes > Edit VAT > Edit rates > Selecting the cog on the right hand side > Select include inactive and then turn on the new VAT codes
Supplier of Services (Sub-contractor)
- Where written notice has been received from the recipient of services as to whether or not they are at the end of the supply chain, this should be retained for future reference.
- Sales invoices should be created and posted onto Sage, Xero and Quickbooks, categorising correctly for VAT, as above.
- Now that VAT is no longer charged, and it is no longer possible to use this VAT collected from customers as working capital, before paying it over to HMRC, consideration should now be given as to whether the business cash flow can operate with this extra strain.
- Considering the opportunity to delay these new rules by bringing forward sales invoices before 1 March 2021.
Where all or a large proportion of services supplied are sub-contracting, and subject to these new VAT rules, it is probable that all future VAT Returns will be refund claims. Consideration should therefore be given to whether monthly returns are preferable to quarterly returns