Construction Industry Scheme (CIS) and the VAT Reverse Charge
February 24, 2021

VAT Reverse chargeBig changes for construction sector finances with HMRC’s new VAT Reverse Charge scheme

This blog outlines how the new Domestic Reverse Charge scheme will affect the VAT returns and cash flows of businesses in the construction industry. The changes come into effect on Monday 1 March 2021.

We are a specialist accountant for the construction industry and have many clients in this sector. If you work in this field, it is important that you fully understand the significant tax change about to happen to your industry.

It will be some consolation to note that this scheme only takes effect when both customer and supplier are registered for VAT and the supply of goods or services falls under the CIS scheme. If these two conditions are not met, then the existing rules continue to apply.

Current system

Usually a company would invoice a customer for work done (100%), plus VAT (20%) and receive Gross (120%). The customer then pays the Gross (120%) to the supplier and reclaims the VAT through its quarterly return. For the majority of cases, this system will remain, as outlined below.

SUPPLIER    £CUSTOMER    £
Net invoice1,000Purchase invoice(1,200)
VAT   200Claims back VAT     200
Sales invoice1,200
Paid over in VAT  (200)
Income to supplier1,000Expenditure for customer(1,000)

 

New system for VAT and CIS registered businesses

However, if both businesses are VAT and CIS registered and the customer has confirmed that they are not the end-user of the goods or services, then the following must apply:

  • The supplier will no longer disclose the VAT on their sales invoice, and will instead simply list the price of goods or services.
  • The sales invoice must inform the customer that the VAT reverse charge is applied and it is the customer’s responsibility to account for the VAT using the reverse charge procedure.
  • The customer will then account for both input (purchases) and output (sales) tax on invoices they receive from VAT-registered suppliers.
SUPPLIER    £CUSTOMER    £
Sales invoice1,000Purchase invoice(1,000)
Input VAT to be claimed  – 200
Output VAT to be claimed     200
Income to supplier1,000Expenditure for customer(1,000)

 

This means that neither supplier nor customer will suffer the VAT. The entire objective is that the VAT will only be paid when it reaches its end-user or final customer.

Please remember that this change must apply unless you have been told that the customer is the end-user. In all other circumstances, the normal VAT rules apply.

How will the VAT Reverse Charge affect my business?

The examples above demonstrate that whilst the profitability of your business will not be affected, its day-to-day cash flow may well be. Certain businesses that were receiving £1,200, are now only receiving £1,000, whilst still maintaining the same level of profit.

A further implication may be that your business will now make repayment claims to HMRC, as you may no longer receive VAT on some of your sales.

One possible way to ease the pressure of the new legislation may be to change from quarterly VAT returns, to monthly. This will allow you to better manage your cash flow.

What you need to do

If you think that your business will be affected by the change then we advise that you take the following steps:

  • Ensure that you have an agreement between your customers and suppliers over each other’s status and how they plan to treat invoices.
  • Ensure that your bookkeeper is fully aware of the update and how to account for the transaction.
  • Consider ways that your cash flow could be impacted.

Exemptions

The reverse charge does not apply if any of the following are present:

  • The goods in question are exempt of VAT
  • The goods in question are not covered by CIS, unless linked to such a supply
  • Supplies of staff or workers.

Similarly, the reverse charge does not apply to VAT-able supplies made to the following:

  • Non-VAT registered customer
  • End users – i.e. a VAT registered customer who is not intending to make something more with the goods or services provided
  • Companies who are connected or in the same group
  • Overseas customers – the reverse charge only applies to UK-based companies.

We are here to help

We are a specialist accountant for the construction industry, so can offer skilled support for your business. If you would like to talk to a qualified accountant or tax specialist about these measures, or any other financial matter, then please do not hesitate to get in touch.

Our bookkeeping team are also always on hand to help you record these new transactions on your preferred online accounting and desktop bookkeeping software.

We provide an efficient, cost-effective VAT service for a broad range of construction companies, from new start-ups, through to large multi-site operations. If you want to find out more about our work and the other services we offer, you can read more here. You can also email or call us on 0161 370 9600.  

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