Quite a lot of the VAT work we do involves advising clients on the VAT treatment of construction projects. This includes advice to both builders and their customers.
While we deal with quite a range of queries, we thought it was worth mentioning two broad areas in particular that clients are currently (mid-2021) asking us for help with.
Domestic Reverse Charge
Since 1 March 2021, VAT is no longer chargeable by a VAT registered supplier in the following circumstances:-
- It is supplying a service of a type covered by the Construction Industry Scheme - "CIS"
- The supplier's customer is registered for VAT and CIS
- The customer hasn't given a declaration that it is an "end user"
An end user is someone who is not making onward supplies of building services. For example, it is the owner of the building. Certain other parties are treated as end users, e.g. if the building owner is a company, and it appoints a company within the same corporate group to act as its main contractor, the main contractor will be treated as an end user because of its close linkage to the "real end-user."
If these conditions are met, the supplier should not charge VAT, instead the customer will deal with the VAT, whether at 5% or 20%, on its VAT returns by applying a "reverse charge". Clearly if the work is zero-rated (e.g. construction of a new dwelling) there is no VAT to reverse charge.
The reverse charge basically involves the customer declaring the VAT on the sale in Box 1 of its VAT return, as if it had made the supply, then reclaiming the same sum in Box 4 of the same VAT return.
This means that the VAT is no longer being paid over by: -
- the customer to the supplier;
- the supplier to HMRC; or
- by HMRC to the customer
The key objective from HMRC's perspective is that an unscrupulous supplier can no longer collect the VAT from the customer but fail to pay it over to HMRC. But all affected businesses must consider how the above will impact on cashflow. A sub-contractor that has hitherto enjoyed the cashflow advantage of being paid promptly by its customer, and banking the VAT element for some weeks before it files and pays its quarterly VAT return, will of course be adversely affected.
Issues in practice
Cashflow impact-see above.
If a contractor charges VAT when the reverse charge applies, in principle the customer cannot reclaim this VAT.
We've seen some main contractors send standard letters to subbies saying if you charge us VAT, you won't get paid. This approach does of course rely on the main contractor only sending these letters where appropriate-e.g. limiting such letters to trades within CIS.
The sub-contractor can't just rely on its main contractor telling it whether to charge VAT. If the contractor assumes that the reverse charge would apply, and doesn't charge VAT, it is at risk if one of the conditions isn't met, and HMRC later demands the VAT it should have charged, plus a penalty. This could be extremely unfortunate if, in the meantime, the sub-contractor has fallen out with its customer, or the latter has become insolvent.
While HMRC has promised a "light touch" in the first few months of operation, we are assuming that in due course HMRC will be expected to maximise collection of tax revenue to rebuild the UK's finances post-Covid.
HMRC produces some decent guidance material, available at VAT reverse charge technical guide - GOV.UK (www.gov.uk) and in particular produces flowcharts for both supplier and customer. Our advice, at least until the Reverse charge becomes totally familiar to your business, is to evidence your efforts to apply the correct treatment.
For example, if you are a building contractor, print off the flowchart for each significant contract, record the customer's VAT number and CIS status, etc. and retain in your files.
The HMRC guidance also covers matters such as the correct format of invoices when the reverse charge applies. This is backed up by the guidance and manuals issued by the various accounting software providers, who have adapted their software to deal with the requirements.
However, more than one client has suggested that the above resources are written with the FD of a large, listed building company in mind, rather than the bookkeeper of a small local builder. If you need further help, taking account of your individual circumstances, talk to your usual AG contact.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
