Yes, it’s a boring title, but you need to know about it!
What is it?
It’s a major change to the way VAT is collected across the building industry.
From 1st March 2021 construction businesses which would typically charge VAT to other VAT registered businesses also operating in the construction industry will no longer need to.
Instead, the customer receiving the service will to pay the VAT due to HMRC rather than paying the supplier. They will then receive the same amount as credit of input tax, the reverse charge, and so the net VAT charge will be nil.
The customer paying it must not be an end user (e.g. land owner) or customer (e.g. home owner). And they must be VAT registered.
Who is affected?
Any VAT registered businesses who supply or receive construction related services.
When does it start?
It comes into effect from 1st March 2021, although it was previously due to come into effect on 1st October 2019, but was delayed until October 2020. Due to the impact of Coronavirus on the construction industry, it was delayed for a second time to 1st March 2021.
HMRC have said they’ll take a soft approach for errors in the first 6 months to give taxpayers time to adjust – providing taxpayers are trying to comply with the legislation.
Why are they bringing it in?
They are trying to reduce the amount of people they are chasing for VAT. Stopping businesses charging VAT when it’s not needed reduces the risk of the VAT not being paid and there being a loss to the exchequer.
I only make zero rated sales, will I be affected?
In short, no. You don’t charge VAT on your sales. You’ll just need to be more vigilant if you switch to sales at 5% or 20% in future as you’ll deal with them differently than what you would have done.
What are the issues going to be?
We think there will be several issues which businesses need to think about
Cash into your business will reduce as you’ll no longer be charging VAT. Whilst you know that cash would be going to HMRC, you could be using it for up to 4 months. This will no longer be the case. However, it could mean you will have repayment returns going forward. And monthly VAT returns could help you to get your hands on the cash quicker.
You’ll need to ensure that your software can handle the new rules. If you’re issuing invoices, you need to put specific wording on your invoices telling your customer what they need to do next. And if you’re paying invoices, you also need to know how to account for the reverse charge. Our software supplier, QuickBooks Online, will be ready for this.
Services with reverse & non-reverse charge elements
If you have mixed supplies on an invoice e.g. an alarm installation and a new wall, the whole supply falls into the reverse charge regime.
Stage payments / contracts
It all comes down to the tax point, which is the earlier of the date of payment or date of invoice. Anything prior to 1st October 2019 will be subject to the current VAT rules. If it’s after that date then the domestic reverse charge will apply.
This is a huge change in the industry. You need to ensure your software is up to the task and you have a good understanding of the rules to avoid penalties in future. More information can be found here.
And you can always get in touch with us if you want more information or ways to try and mitigate your issues. We’re always happy to help!