On 1st March 2021, HMRC are introducing significant changes to the VAT scheme for construction to combat VAT fraud within the sector.
The Reverse Charge VAT legislation applies to those individuals or businesses registered for VAT in the UK (although it will not apply to consumers) that supply any of the Construction Industry Scheme (CIS) specified services.
This means that from 1st March 2021, Main Contractors will pay VAT due directly to HMRC, rather than to a business. As a supplier or subcontractor, it is important to have an understanding of the changes and the repercussions they may have on compliance with the regulations and on cash flow.
How Open ECX’s WebContractor can support your business with the change:
WebContractor offers leading-edge technology that provides a fail-safe platform for well-known construction businesses to digitise and transform their commercial processes.
New functionality supports contractors in handling the changes introduced with the new Reverse Charge VAT regulations, reducing operational risk and ensuring a smooth process. Examples of this include:
- Enabling Main Contractors to make On Account Payments as part of a planned payment, or, to make a payment earlier than normally expected.
- The Main Contractor’s Trade Codes are used to determine which trades or services will follow Normal VAT rules, and which will need to comply with Reverse Charge VAT rules. To help deal with the transition, all Trade Codes could be automatically set to Reverse Charge, and then updated to Normal VAT for those that are Exempt Services, should that suit for the Contractor.
- Where it is possible for a single Trade Code to cover both Reverse Charge VAT and Normal VAT services, WebContractor recommends that an additional Trade Code should be raised so that there is a specific Trade Code for each VAT Treatment type, together with a detailed Trade Code Comment to explain what types of work are covered by each individual Trade Code.
- Every time a Subcontract Order is raised and a Quantity Surveyor selects the appropriate Trade Code, the Trade Code Comment is displayed. The more accurate the comments the better; providing guidance to the QS and driving tighter control during the WebContractor validation process.
- Each time a Subcontract Order is raised for a Normal VAT designated Trade Code service, the Quantity Surveyor is challenged by WebContractor to confirm that they intended to place a Normal VAT Subcontract Order, and if so, provide a brief comment as to why Normal VAT Treatment should apply.
The team at WebContractor will be available and on-hand to Contractors should you have any queries about the upcoming changes. For more information on the platform and to gain the vital support ahead of it being introduced, visit our site here.
How to prepare for it internally:
- Check whether the Reverse Charge will impact sales, purchases or both.
- Ensure accounting and other systems are up to date to cope with Reverse Charge.
- Consider any impact on cash flow.
- Confirm all Applications for Payment or Invoices are Reverse Charge VAT compliant.
- Contact regular customers or suppliers.
- The cut-off date is the 1st March 2021.
- Invoices dated up to or on the 28th February 2021, and Applications for Payment submitted on or before the 28th February 2021, WILL be paid with VAT in the normal way, and the supplier / subcontractor will be responsible for paying that VAT to HMRC.
- Invoices dated on the 1st March 2021 or later, or Applications for Payment submitted after the 28th February 2021 (including those for retention release), will be subject to the new rules, and WILL NOT be paid with VAT, with the Main Contractor being responsible for paying that VAT directly to HMRC.
This is a major change for everyone, so be sure to take the time to:
- Read the information on the Government website.
- Talk to your accountant.
- Redesign your Invoices and Applications for Payment.
For further information, the published HMRC guidance on VAT Domestic Reverse Charge can be found here.