After several delays, the VAT domestic reverse charge for construction services is due to come into effect on 1 March 2021. If you’re not sure what this means for your business, read on for more information.
What is the Domestic Reverse Charge?
First announced in 2017, the Domestic Reverse Charge is HMRC’s way to fight VAT fraud in the construction industry. Also called Carousel Fraud or “missing trader fraud”, some contractors collect VAT and then disappear before the time comes to pay HMRC.
Under the old scheme, those supplying the construction services will have to account for the VAT. With this new policy, the customer will account for the VAT and it will be considered input tax for them as if they’ve made the supply to themselves.
In other words, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC for the services they provide.
The payment received will be for the cost of the work and materials used, net of any CIS deductions for the National Insurance and tax, but no VAT will be paid on the invoice.
This change will affect all CIS-registered businesses working as contractors and the recipients of their services.
What you need to do to prepare
With just weeks to go until the VAT domestic reverse charge for CIS comes into effect, how can you prepare? Here are some ways:
- Businesses under the Flat Rate Scheme (FRS) are highly likely to be affected by higher VAT costs. So if you are currently registered under this scheme, you may need to leave this before the new policy gets implemented.
- Take the time to review your existing contracts and adjust them to reflect the VAT domestic reverse charge.
- Update your accounting systems accordingly or seek the help of your accountant so you can keep your finances on track with greater ease and accuracy.
- Identify potential cash flow issues and consult with your advisor on actions you need to take to cushion the impact on your business.
- Make sure relevant staff are updated on the reverse charge and educate them on how it may change their role.
- For subcontractors, it is important to confirm with customers whether the VAT domestic reverse charge will apply to your contract with them. Also confirm if your customers are the end-user of your service and keep this on record.
- Check the VAT status of future customers and determine if the reverse charge is applicable.
Domestic reverse charge VAT legislation is a change in the way CIS registered construction businesses handle and pay VAT. It is being introduced in the UK on 1st March 2021. In our video, we cover all you need to know to be ready for it.
- Check HMRC’s guidance
- View Xero’s guide (linked below)
- Remember to contact us for specific advice if you are on the flat rate scheme.