Changes to VAT for the construction industry

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Major changes to the way VAT is collected within the UK construction sector will come into play next week, after being delayed due to the Coronavirus pandemic.

The Domestic Reverse Charge, also known as the Reverse Charge, will require the customer receiving the service to pay the VAT to HMRC, rather than the supplier.

The Reverse Charge was delayed for a period of five months from October 1, 2020 and will now come into effect from March 1, 2021.

In addition, there will be an amendment to the original legislation, which was laid out in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers.

However, businesses must be prepared for the changes, with HMRC saying it ‘remains committed to the introduction of the reverse charge and has already increased compliance resource’.

The new rules apply to VAT registered businesses which supply certain construction services to other VAT registered businesses for onward sale.

The Reverse Charge does not apply to businesses who do not make onward supplies of the services, HMRC class this group as ‘end users’.

HMRC is warning businesses to be prepared for the changes by:

  • checking whether the Reverse Charge affects either your sales, purchases or both
  • making sure your accounting systems and software are updated to deal with the Reverse Charge
  • considering whether the change will have an impact on your cash flow
  • making sure all your staff who are responsible for VAT accounting are familiar with the Reverse Charge and how it will operate
  • Contractors will need to review all contracts with sub-contractors, to see if the Reverse Charge applies, and notify suppliers if it will
  • Sub-contractors will need to contact customers to see if the Reverse Charge will apply, and whether they are an end user or intermediary supplier.

For further information contact Nick Charnley, tax manager at Ellis & Co on 01244 343504.

Ellis & Co Chartered Accountants and Business Advisers, Chester & Wrexham - 01244 343504, info@ellis-uk.com