New VAT Reverse Charge from 1 March 2021
From 1 March 2021 the new “domestic VAT reverse charge” must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:
- for individuals or businesses who are registered for VAT in the UK
- reported within the Construction Industry Scheme
What does this mean?
In short, you will no longer be charging VAT to customers for work carried out under CIS rules!
What work does this new VAT charge relate to?
The new VAT reverse charge goes alongside the normal rules for CIS in terms of the type of work to which is applies. So if your work falls into CIS, it will usually mean the new Reverse Charge kicks in for VAT purposes.
YOU MUST USE the reverse charge for the following services:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
DO NOT USE the charge for the following services, when supplied on their own:
- drilling for, or extracting, oil or natural gas
- extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
- manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
- the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
- making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
- installing seating, blinds and shutters
- installing security systems, including burglar alarms, closed circuit television and public address systems
What do you need to do to prepare for this change?
There are a few things you need to do to prepare for the new VAT Reverse Charge:
1. Make sure the new VAT rate is set up on Xero (spolier alert – we will have this done for you!)
2. Think about how this will affect your cash-flow
3. Contact your accountant to clarify the new charge and rules
4. Check with your contractor that they are VAT and CIS registered and that the work being done falls within CIS
5. Make sure you add proper details to your VAT invoices from 1 March 2021
For all our existing clients, feel free to contact us if needs be to check details before you issue new invoices to contractors on or after 1 March 2021.
In relation to your invoicing to your contractors, the invoice must now state that reverse charge applies. HMRC recommend including the following wording:
‘Reverse charge: VAT Act 1994 Section 55A applies’
IMPORTANT: The cash-flow impact
If all of your income falls within the CIS rules and all the work you carry out is for contractors, the new VAT Reverse Charge is going to change your cash-flow. You’ll now be charging 20% less to your contractors but still paying out VAT on various goods and services!
To fix this, we are recommending that your business switches to monthly VAT returns instead of quarterly VAT returns.
For our existing clients, contact us NOW if you want to make this change and we will discuss the ins and outs with you (fear not, we will be in touch with you soon anyway!)
Easy to follow guides
HMRC have produced flowcharts to follow to help you implement the new VAT domestic reverse charge.
(a) If you sell building and construction services
Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:
- your customer is registered for VAT in the UK
- payment for the supply is reported within the Construction Industry Scheme (CIS)
- the services you supply are standard or reduced rated
- you’re not an employment business supplying either staff or workers, or both
- your customer has not given written confirmation that they’re an end user or intermediary supplier
(b) If you buy building and construction services
Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:
- payment for the supply is reported within the Construction Industry Scheme (CIS)
- the supply is standard or reduced rated
- are not hiring either staff or workers, or both
- you’re not using the end user or intermediary exclusions