The domestic reverse charge (usually referred to as the ‘reverse charge’) is changing the way VAT collection is undertaken in the building and construction industry. From the 1st October 2020, customers receiving a service in the construction industry will be required to pay the due VAT directly to HMRC (rather than the supplier). This only applies to individuals or businesses registered for VAT in the UK.
There is a difference between CIS payments and the reverse charge (where materials are included within a service). The reverse charge is related to the entire service, where-as CIS payments to net sub-contractors are apportioned and do not warrant deductions on materials.
In order to be prepared for the introduction date, several precautions are recommended. The first necessary step to take is that of checking whether the reverse charge will affect either sales, purchases or possibly both. If/when you identify you will be affected, it is of paramount importance that all accounting systems and software are updated to deal with this. Another important procedure is to evaluate the affects of the reverse charge upon cash flow. Of course, a reputable accountant will achieve this efficiently and with precision.
Contractors should review all contracts with sub-contractors to determine whether the reverse charge will apply to the services they provide. Suppliers need to be notified if this is the case.
Sub-contractors are required to contact customers to ask for confirmation of whether the reverse charge will apply. This includes the confirmation of whether the customer is an end-user or an intermediary supplier. If it is obvious that a customer is an end user, it is appropriate to charge VAT in the usual way. For businesses that often deal with end users, a practical way of dealing with the question of end user status is for the business to include a statement in their terms and conditions to say they will assume that their customer is an end user unless they say otherwise.
Due to the fact that some businesses may find themselves no longer paying VAT on the entirety of their sales, they may become repayment traders. What does this mean? It means that their VAT will be in the form of a net claim, rather than a net payment. Repayment traders have the ability to apply for their returns to be made monthly, so to speed up payments due to HMRC. The ideal time to initiate a move to monthly returns is dependent on the business and whether they want to have monthly returns from October, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 October.
Fortunately, customers who received construction industry services will have the ability to recover the VAT, subject to the usual rules for VAT recovery. It is recommended that those without experience seek professional accountancy services in order to maximise potential returns.
HMRC have stated that they will take a slightly lighter approach in dealing with errors made in the first 6 months of the new legislation. If you require further advice on this or you are concerned how this may affect your business it would be advisable to discuss this your accountants
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.