The domestic reverse charge for the building and construction sectors was due to be implemented back in October 2019 but with HMRC resources focused in on the implications of Brexit and a view that the sectors was not fully prepared for this major change it decided to delay it to 1st October 2020.
With the pandemic having put strains on HMRC’s workforce the decision was made in June to further delay the roll-out of the domestic reverse charge till 1st March 2021.
The domestic reverse charge is an extensive initiative by HMRC to combat VAT fraud within the construction sector that work under the Construction Industry Scheme (CIS). It has been observed that subcontractors were posing as VAT registered businesses and undercutting legitimate VAT businesses with the knowledge that they would ‘pocket’ the VAT for themselves.
From 1st March 2021, a subcontractor will not get paid for the VAT on their invoice if their customer in not the ‘end user’ as the VAT gets reverse charged.
For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.
Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users. Intermediary suppliers means that if a number of connected businesses are collaborating together to purchase construction services, they are all treated as if they are end users and the reverse charge does not apply to their purchases.
You cannot choose whether you are an end user or an intermediary supplier because it is a matter of fact.
To prepare for the changes in VAT coming 1st March 2021 businesses need to prepare by:
- checking whether the reverse charge affects either your sales, purchases or both
- making sure your accounting systems and software are updated to deal with the reverse charge
- considering whether the change will have an impact on your cash flow
- making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate
If you are unsure how the new VAT Notice applied to your business, please do not hesitate to contact Taxfile on 020 8761 8000 and speak to one of our VAT advisors.