Just over a year ago, we reported how the ‘domestic reverse charge for construction services’ had been postponed to October 2020. Better known as the Construction VAT Reverse Charge, this scheme has been further put back until 1st March 2021.
If you work in the construction industry – particularly as a contractor or subcontractor – you need to know about the changes and prepare for them. This post provides you with a recap of the scheme and how it will work.
The current situation
Presently, if you are a VAT registered subcontractor and you provide construction services to a contractor, you can charge VAT on the work you carry out. You account for the VAT you charge and pay it over to HMRC when you complete your VAT return.
Enter the Construction VAT Reverse Charge
Things will change from 1st March 2021. When you provide services to a contractor, they become responsible for working out the VAT applied to those services.
The contractor does not pay over the VAT to the subcontractor. Instead, they declare the VAT on their own tax return. However, on the same VAT return they declare the same amount as a deduction. This is what is known as the ‘reverse charge’.
Why the change?
The new scheme is designed to combat fraud. The rationale is to stop companies charging contractors VAT, only to disappear without paying the money over to the taxman.
Are there exceptions to applying the VAT Reverse Charge?
Yes, but they are very detailed. Subcontractors should not use the reverse charge when charging for certain services that are supplied on their own. These include:
- Drilling for, or extracting, natural oil or gas
- Installing security systems, such as burglar alarms, CCTV and PA systems.
- Manufacturing building or engineering components, materials, plant or machinery, or delivering these to site.
For full details on when the charge does and does not apply, please visit this page on the gov.uk website.
What should sub-contractors do next?
If you are a subcontractor, we strongly recommend you get in touch with an accountant here at THP. If you currently use cash accounting or flat rate VAT schemes, these may no longer be the best options for you under the new scheme. We can advise you, based on what you tell us about your circumstances.
What should contractors do next?
You really need to get to grips with the scheme as soon as possible. Although HMRC says it will apply a ‘light touch’ for errors during the first six months of the scheme, it can apply penalties if you don’t account for the reverse charge properly. From the outset it won’t hesitate to apply these if it feels you are taking advantage of the scheme. see from the official technical guide, it’s a complex scheme and it will be easy to make errors. So please talk to an accountant at THP to make sure you are ready to apply the scheme compliantly.
About Karen Jones
Having worked for one of the world’s largest accountancy firms, Karen Jones uses her tax knowledge and skills to help clients obtain substantial reductions to their tax liabilities.
With an expanding portfolio of tax clients, Karen enjoys the variety her work brings her and particularly likes working with new businesses and people. With a growing number of tax clients, she frequently faces a variety of challenges and relishes the experience she gains as she solves them.
Karen likes the THP ethos: “I like the way the team has a professional, but friendly and down-to-earth approach – it creates a productive atmosphere that benefits everyone.”
Karen’s specialist skills:
- Personal Taxation
- Tax Efficient Planning
- Trust Administration