Is your construction business part of the Construction Industry Scheme (CIS)? If so, with the introduction of the VAT domestic reverse charge for building and construction services, the way you handle and pay VAT is likely to change. Understanding the changes will help you boss your business.
The VAT reverse charge came into force on 1 March 2021. The mandatory legislation means VAT-registered subcontractors (the supplier) who provide a service plus any related goods to a VAT-registered contractor (the customer) who is CIS registered doesn't need to account for the VAT.
Instead, it's the customer who now has to account for the VAT as an input tax – as if they had made the supply to themselves. Any building and construction materials used to supply the services are included here. However, this doesn't apply to materials bought and sold without related services.
Why the change happened
The government rolled out the reverse charge initiative with the aim of combatting fraudulent activity in the construction industry, which totals millions of pounds each year.
The easiest way to remove subcontractor VAT fraud (also known as carousel fraud) is to take the option to charge and collect VAT away from the participants. In this way, you remove the flow of money, meaning it's tougher to commit fraud.
Since the reverse charge makes it the responsibility of contractors to account for VAT, subcontractors now have less chance to 'disappear' without paying the tax to HMRC.
Applicable services and exemptions
The HMRC website has a list of services that the VAT reverse charge applies to. It also highlights a series of exemptions, which you should be aware of.
According to HMRC: "If still in doubt, provided the recipient is VAT-registered and the payments are subject to CIS, it is recommended that the reverse should apply."
However, if you're unsure whether the new legislation applies to the services your business provides, your first port of call should be to speak to HMRC or a VAT specialist.
HMRC's light touch to mistakes
When new legislation comes into play, there's always the chance that errors may creep in. With that in mind, HMRC has said it will apply a "light touch" to any mistakes made in relation to changes brought about by the VAT reverse charge in the first six months of its implementation. However, beware of simply ignoring the requirements or making deliberate errors, as this could lead to negative repercussions.
What you need to do now
It's worth taking the time now to educate yourself about the VAT reverse charge. Take control of your processes by reviewing them and making any relevant amends. If you're a contractor, speak to your subcontractors about the changes (and vice versa). Follow HMRC's guidance to ensure your invoices are updated and used correctly. And by using good cloud accounting software, such as Sage Accounting, you can ensure you're bossing your VAT reverse charge requirements.
Stay on the front foot with Domestic Reverse Charge VAT.
From 1 March 2021, HMRC are making changes to how VAT is processed in the construction sector. Watch the free webinar to learn how the changes affect you.
Copyright 2021. Article made possible by Tom Ritchie, Product Marketing Manager, Sage