New VAT rules for Construction Sector from 1st March

Written by yasiradnan94
19 February 2021

From 1st March 2021 new rules for VAT in the construction sector are set to be introduced. These rules are commonly known as domestic reverse charge for construction services. These changes were first announced in 2017 and were due to be implemented originally in 2019 but deferred, first to October 2020 and then again to 1st March 2021. This time, the changes are coming into force.

This new system will impact all sub-contractors supplying services (mostly within CIS) to other contractors in the construction sector. The rules will not apply to invoicing to domestic consumers.

Who does it apply to

The charge applies to standard (20%) and reduced-rate (5%) VAT services:

  • for individuals or businesses who are registered for VAT in the UK
  • reported within the Construction Industry Scheme

Why are things changing?

The reason for this change from HMRC is fundamentally due to what they believe is highly fraudulently area within the construction industry with regards to VAT payments – where a business in the supply chain ‘goes missing’ and thereby doesn’t pay across VAT to HMRC. From 1st March, the sub-contractor will not charge VAT on their invoice to the contractor, and will be paid therefore only the net value of work done, without the VAT.

What will it impact?

Essentially the changes can be broken down into the following;

  • potential impact to cashflow
  • impact on how you invoice
  • administrative requirements of VAT

Accounting systems and software will need to be checked to ensure they can deal with the reverse charge system. All personnel responsible for invoicing and accounting will need to be familiar with the reverse charge scheme. Cash-flow may be impacted by the arrangement for subcontractors who will no longer collect VAT from contractors before paying this to HMRC.

The good news for subcontractors is the likelihood of regular VAT repayments as a result and it may be prudent for them to switch to monthly VAT return frequencies.

What Next?

It is imperative for you to understand how the changes will impact your business and identify whether you have the systems in place to support the change.

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