There is a new way of accounting for VAT in the construction industry that comes into force on the 01-03-2021. The scheme is called ‘The Domestic reverse VAT charge for the construction industry’. This is an anti-fraud measure to prevent criminals charging VAT on their sales invoices when they have no intention of paying that VAT over to HMRC.

The points to note are as follows:

  • This will affect any invoice raised on or after 01-03-2021.
  • It will only affect situations where a VAT registered subcontractor invoices a VAT registered contractor.
  • If you’re invoicing a non VAT registered contractor or the end user for a private job, then the normal rules apply and you should charge VAT at the appropriate rate
  • If you are the VAT registered subcontractor invoicing a VAT registered contractor where you would normally charge VAT, your sales invoice needs to be raised in accordance to the new reverse charge scheme
    • If you use Xero you can add new tax codes so the software shows this for you.
    • If you use another piece of software that cannot select a reverse charge code, you need to use zero rated VAT and specify that: “This invoice is subject to the reverse charge at the standard rate” (5% if needed etc.)
  • If you are the VAT registered contractor and you receive an invoice from a subcontractor, it is up to you to ensure there is no VAT on the invoice.
  • If the subcontractor has charged VAT, the contractor needs to make them re-issue the invoice. They cannot pay the invoice including VAT and then claim it back from HMRC on their VAT return
  • The main affect is that the contractor will pay the subcontractor the net fee (without VAT), which will have cash flow implications for the subcontractor. He will receive less money from the main contractor, albeit that he’d have to pay it over to HMRC in due course.
  • Conversely, the main contractor’s cash flow will improve.
  • When the main contractor enters the cost onto their accounting software, it will have to be entered with the tax code ‘Reverse Charge Expenses (20%)’. This will enter 1/5 of the net value on the invoice in both box 1 and 4 of their VAT return.
  • This costs the contractor nothing. They never pay the VAT over and the VAT is both in output VAT and input VAT
  • If you are a subcontractor and you are worried about the cash flow implications mentioned above, we could look at moving you your VAT reporting periods to a monthly basis.

If you have any questions or would like any further clarification please do not hesitate to get in touch.

Michael Broome – 01392 360 008