The UK government has instituted a new domestic reverse charge VAT method to shift the burden of paying the VAT from the supplier to the customer. With a few exceptions that we’ll go over later, the new regulations apply to businesses that are part of the Construction Industry Scheme (CIS) and influence both cash flow and VAT compliance.
The new regulations are intended to lessen “missing trader” fraud, which happens when a corporation establishes a construction business, charges VAT to clients, and ends operations before tax is due, essentially pocketing money that is not theirs. It is predicted that fighting this VAT fraud will generate more than £100 million annually.
In this post, we’ll explain what the VAT domestic reverse charge is, whom it applies to, and what you must do to prepare.
VAT Reverse Charge for Construction Industry
The VAT domestic reverse charge for building and construction services in the UK impacts some types of construction services. Both contractors and subcontractors see the impact. You may need to adjust how you manage and pay VAT if your construction company participates in the Construction Industry Scheme (CIS).
It denotes that VAT-registered suppliers (subcontractors) who deliver services and any associated goods to a VAT-registered contractor (customer) with CIS registration no longer need to keep track of the VAT. Instead, the buyer treats the VAT as an input tax and records it as though they were the ones who produced the supply.
This also applies to any building or construction supplies utilised to provide the services. You cannot opt in or out of the VAT domestic reverse charge for building and construction services or decide to apply it just to specific invoices because it is a requirement.
Figuring Out Who is Affected?
If your company belongs to any of the following and is also registered with the Construction Industry Scheme (CIS), then the VAT reverse charge for construction applies to your company:
- Contractor (your business engages subcontractors)
- Sub-contractor (your business supports contractors)
It does not apply to services provided to non-VAT registered persons or enterprises; hence work performed for homeowners/domestic users should be billed in accordance with conventional procedures.
Neither does it apply to work accomplished abroad. It is restricted to British construction firms operating in the United Kingdom. Reverse charge supplies are exempt from the Flat Rate Scheme if your company uses them and should be recorded as usual. The Flat Rate Scheme participants who receive reverse charge supply must account for the VAT owed to HMRC.
Prerequisite Requirements for Contractors
The following are the fundamental requirements for businesses that use subcontractors registered with the CIS:
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Across-the-Board Communication:
One of the key concerns is informing CIS and VAT-registered subcontractors about the new laws, as smaller businesses, in particular, may be unaware of the changes. It is possible that it will be necessary to contact each CIS and VAT-registered subcontractor individually to ensure that they are aware of the changes brought about by implementing the VAT reverse charge for construction. Getting this information over to shareholders of smaller enterprises, such as sole traders, is of the utmost importance.
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Modification in Accounting Procedures:
Following the implementation of the VAT reverse charge, it is now required to pay VAT and CIS registered subcontractors net of VAT without including the VAT amount. This may provide a cash flow benefit, as the VAT amount is no longer paid to the subcontractor and can be held until the next return, along with the rest of the VAT accounting.
However, proper records of this accounting must be maintained, and firms must also keep track of the amount of CIS tax that is withheld from subcontractors in compliance with the standard rules.
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Cross-Checking Suppliers and their Invoices:
Businesses must ensure consistent compliance with the new laws by guaranteeing that subcontractors are qualified for the reverse charge and that invoices claiming the VAT reverse charge include work that fits within the mandate.
On a regular basis, you have to make sure of 2 requirements: First, subcontractors are eligible for the reverse charge (are they VAT-registered and part of the CIS?), and the other, the work on the invoices that claim VAT reverse charge falls within the remit.
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Impact on VAT Returns:
The implementation of the VAT reverse charge has an impact on the completion of VAT returns. Box 1 of the VAT Return should include output tax on purchases subject to the domestic reverse charge. Box 6 should not be filled out with the number of such purchases.
Input tax on domestic reverse charge purchases can be reclaimed in box 4 of the VAT Return, and the purchase amount can be included in box 7 as usual. Companies who need help with how to comply with the new laws should seek advice from an accountant, a VAT specialist, or HMRC.
Prerequisite Requirements for Sub-contractors
When working with a contractor who is registered with the CIS, you will be required to do the following at a bare minimum:
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Across-the-Board Communication:
Get in touch with all of the contractors already registered for CIS and VAT to ensure they are aware of the VAT reverse charge. Ensure that you can adhere to any additional restrictions they could have.
Because the VAT reverse charge falls under your responsibility, it is up to you to make sure that your accounting and invoices are accurate. Inform both yourself and your workers about the upcoming adjustments. There are several small requirements and considerations that are simple to overlook.
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Adjustments in Accounting Procedures:
As the VAT reverse charge is now in place, you must send VAT reverse charge invoices to CIS-registered contractors. These invoices are different from ordinary VAT invoices in their format and content. A CIS-registered contractor will no longer provide you with the VAT component of the payment. In addition, you will no longer get the payment.
Because you will no longer have access to this money before it is sent to HMRC on a monthly or quarterly basis, you should make preparations for the possibility that this will affect your cash flow. You could even become what’s known as a “repayment trader,” which is a company that submits a VAT Return and asks HMRC for money rather than paying the required amount.
If this is the case, consider switching to filing your VAT returns monthly to enhance your company’s cash flow. For additional information on this matter, you should seek the advice of an accountant, VAT professional, or HMRC as soon as possible.
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Impact on VAT Returns:
After the implementation of the VAT reverse charge, how you fill out your VAT Returns has been modified. You are not required to include any output tax on sales into box 1 of the VAT Return if the domestic reverse charge applies to such sales. Instead, you should enter the total value of these sales in box 6. If you have any questions, consult an accountant, a VAT professional, or HMRC.
Wrapping Up
While dealing with VAT Reverse Charges, insufficient knowledge, and direction may result in fraudulent conduct or financial troubles. If you seek the advice of an experienced and informed professional in the relevant field, you may find the process more manageable for you.
Whether it comes to processing either Normal VAT or VAT Reverse Charges for your company, the knowledgeable staff here at Legend Financial is delighted to assist you in any way they can. Please send us your issue by message or get in touch with us by phone!
