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New VAT Reverse Charge legislation for the Construction Industry

Published: 15/02/2021 By Jane Price

The new VAT Reverse Charge legislation becomes effective 1st March 2021 for businesses involved in buying and selling construction services.  It does not apply to zero-rated supplies of construction services.

The reverse charge is expected to help level the playing field by ensuring that VAT fraud is removed from the supply chain.  150,000 businesses will no doubt feel the burden of the extra administration involved so, in order to simplify the system the reverse charge only applies where the payment for the supply needs to be reported for CIS purposes.  This will automatically remove many end users from its scope without the need for further consideration.

What you need to do:

  • Review your contracts to ascertain who the reverse charge applies to, and then tell your customers.
  • Ask your customer to confirm whether they are an end user or intermediary supplier
  • Check your customer has a valid VAT number
  • Check your customers CIS registration

Is my business affected by the VAT reverse charge?
As from the 1st March 2021 the new legislation means that the purchaser of some construction goods will need to account for the VAT element.  
 
To find out if your company is affected by the reverse charge, HMRC have published two easy to follow flow charts. One for businesses selling construction services and the other for businesses buying construction services.  They should be used to help you decide if the reverse charge applies to you.

The invoicing process.
HMRC have provided a list of services affected by the reverse charge which is shown here.  Any services listed on an invoice that are included within the reverse charge list above must clearly state the VAT rate and be marked ‘reverse charge’.
The invoice should further state that the customer is required to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant rate as shown.  The VAT due should be clearly stated but should not be included in the amount shown as total amount charged.

Completing your VAT return
If you use an accounting software package you should check with your supplier to ensure the software is able to correctly process the reverse charges.  

VAT on sales
Suppliers must not enter any output tax on sales under the reverse charge. The supplier only needs to enter the net value of the sale.

VAT on purchases
If you buy services subject to the reverse charge, you must enter the VAT charged as output tax on your VAT return. Make sure you do not enter the net value of the purchase as a net sale.

Correctly entered invoices should be recorded on your VAT return and processed within your accounting package as usual. Subject to the normal VAT rules.

For further guidance see VAT reverse charge technical guide - GOV.UK (www.gov.uk)