From October 2020, many subcontractors and contractors in the ‘construction industry’ will need to account for VAT differently, by using the ‘reverse charge system’. The aim of this new policy from HMRC is to reduce VAT fraud by limiting the scope for a supplier to collect VAT and then wind the business up without accounting for it to HMRC.
You will be affected if all of the following apply:
- your business is registered for both VAT and the Construction Industry Scheme (CIS)
- it makes standard or reduced VAT rated supplies to another business that is registered for both VAT and for the Construction Industry Scheme (CIS)
- your customer is not an ‘end user’ (ie, they will be making an onward supply of construction services to another party)
- your business is not ‘connected’ to its customer
Where the reverse charge applies:
If you are the supplier you will no longer charge your customer VAT, and your invoices will need to make it clear that your customer must account for VAT under the reverse charge rules. You will receive only the net of VAT sum in payment, and your VAT return entries must reflect these changes.
If you are the customer you will pay the supplier the net of VAT sum, but then account for a notional receipt as well as a payment on your VAT return (NB. these 2 entries will cancel each other out unless you make partially exempt supplies).
As a result of the changes you will need to update your accounting systems and processes; for example:
- how will you identify which supplies of construction services are caught and who will be responsible for doing so?
- which customers are ‘end users’?
- how does the reverse charge system impact VAT schemes such as ‘cash accounting’ or the ‘flat rate scheme’?
- is it possible to mitigate possible cash flow disadvantages?
For further advice please contact David Sutton on 015394 32540.