VAT

Declan Magennis & Company - Chartered Accountants and  Registered Auditors

Value Added Tax

We can assist in all areas of VAT compliance and consultancy, which includes Audit, Compliance (VAT returns, EC Sales Lists, Intrastat returns).

  • VAT accounting advice
  • Reconciliation of VAT accounts
  • Production and filing of VAT and ECSL returns
  • Management of VAT inspector visits

MAJOR OVERHAUL OF VAT RULES FOR THE CONSTRUCTION INDUSTRY 1st February 2021

HMRC are changing the current rules regarding VAT for construction businesses from 1st March 2021.

These changes will only affect VAT Registered sub-contractors within the remit of the construction industry. If you are a non VAT registered sub-contractor involved in the supply of construction services, this should not be relevant to you.  

The objective of these new rules is to eliminate VAT fraud within the construction industry. VAT fraud within the construction sector labour supply chains presents significant risk to the Exchequer. According to HMRC there are too many subcontractors who “disappear” and never pay the vat over that they have charged.

The new rules are referred to as the “domestic reverse VAT charge” for the supply of building and construction services and came into effect from the 1st March 2021.

A ‘reverse Charge’ system means that the sub-contractor does not add output VAT to a sales invoice to the contractor. The supplier does not charge the customer VAT and the customer does not pay the subcontractor any VAT on the supply (but must account for the VAT on their VAT return). Instead the customer reports the Output VAT in Box 1 of their VAT return and claims it back as Input VAT in Box 4.

 

VAT is only charged in the normal way at the final stage of the chain by the contractor to the final customer/client.

The domestic VAT reverse charge system must be used for most supplies of building and construction services that fall within the remit of the construction industry scheme and will apply to both standard (20%) and reduced-rate (5%) VAT services.

What you need to do per HMRC Guidance

You’ll need to apply the reverse charge VAT on your sales, purchases or both from 1st March 2021.

We have attached two flowcharts which have been provided by HMRC and these will assist in determining what you need to do as regards operation of this new regime.

Operating the Reverse Charge procedures – The Supplier (subcontractor)

 

The supplier (subcontractor) is responsible for issuing correct sales invoices, with the correct VAT treatment.

 

Within the scope checklist-

Reverse Charge

1

Is the supply within the scope of CIS

Yes

2

Is it a standard rated or reduced rated supply

Yes

3

Is the customer VAT Registered

Yes

4

Is the customer registered for CIS

Yes

5

Has the customer confirmed that they are not an End User or Intermediary

Yes

If the answer to all of the above is ‘yes’ then the supply is subject to the Domestic Reverse Charge procedures.

 

When preparing a Sales invoice

To comply with the VAT regulations, any invoice for a supply that is subject to the domestic reverse VAT charge must:

  • Not charge vat; and
  • State that the supply is subject to the reverse charge and that the customer is required to account for the VAT.
  • State the amount of vat due under the reverse charge.

If this is not possible then the rate of vat must be shown. This must be in the form of a note and NOT included in the amount charged to the customer

 

The Suppliers VAT return entries

 If you are supplying services then you simply need to enter the net amount of the service in box 6 of the return and nothing into box 1.

This has no bearing on any input vat that you can reclaim in respect of making those supplies.

This is unlike making exempt supplies whereby a partial exemption calculation would be required to determine the quantity of input VAT reclaimable

Operating the Reverse Charge procedures – The Customer (The Contractor)

 

The customer (The Contractor) is responsible for making correct entry’s in its Input VAT claims on its VAT returns.

 

Within the scope checklist-

Reverse Charge

1

Is the supply within the scope of CIS

Yes

2

Is it a standard rated or reduced rated supply

Yes

3

Is the supply made by an employment business

No

4

Has we confirmed that we are an End User or intermediary

No

 

If the answers to the above are “Yes” for 1 & 2 and “No” for 3 and 4 then the supply is subject to the domestic reverse charge procedures.

 

Receipt of an Invoice as a customer

 

When you receive an invoice from a supplier you should also consider the vat treatment and decide if their treatment is correct.

The supplier should have checked this prior to sending the invoice but it is likely that it will take time for people to understand and apply the new rules correctly.

If the reverse charge has not been applied but it should have been then you are still liable to be assessed for the vat. This means you could end up paying additional vat yourself and then having the challenging task of trying to get a correct invoice and refund of payment from the supplier.

 

The customer VAT return entries

 

The customer of a reverse charge invoice should enter the output VAT in Box 1 but no corresponding net figure should be entered in box 6.

The customer should then enter the net amount of the supply in Box 7 and vat in box 4 as usual.

The VAT entered in box 1 & 4 will be the same and in effect the net vat paid to HMRC based on these entries will be zero.

Verification of supply

In order that the supplier (subcontractor) is accounting for VAT in the correct manner, it would be considered good practice to carry out the following verification processes.

  • Obtaining and validating the customers vat number using the link : Check a UK VAT number 
  • Retaining proof that the customer is registered for CIS, such as a previous deduction statement (if an existing customer), or a copy of their CIS verification of you, the subcontractor.
  • End Users and Intermediaries are required to notify their subcontractors of their End User or Intermediary supplier status. The Subcontractor should seek this for each contract.

 

How to prepare

You’ll need to:

  • make sure your accounting systems and software can deal with the reverse charge
  • consider whether the change will impact your cash flow
  • make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work

If the VAT reverse charge does not apply you should follow the normal VAT rules. Please find attached HMRC also have flowcharts to help you decide if you need to use the reverse charge.

 

Penalties

HMRC have said that they will operate a “light touch” approach for the first 6 months after the new rules are introduced.

This is on the assumption that the customer has acted in good faith and is trying to comply with the legislation.

Officers may still hand out penalties during this period if they believe the customer has deliberately taken advantage of the rules.

In addition they have stated that if the supplier has applied the reverse charge but has been misled by the customer then the supplier will not be required to account for output tax on the sale.

If the supplier has not taken sufficient steps to check the credentials of the customer, then they may be assessed for the output tax.

If the supplier incorrectly charges Vat, then the customer will still be assessed for the output tax. The supplier should then reimburse the Vat paid by the customer.