By Emma Forrester, VAT Consultant, Armstrong Watson LLP
A SIGNIFICANT change to how the construction industry accounts for VAT will be introduced from March 1, 2021. The changes apply to businesses making or receiving specified services under the Construction Industry Scheme (CIS).
The reverse shifts obligations for VAT accounting from the supplier to the recipient. The recipient must account for output VAT on the supply received and recover some or all of the input VAT on the same return. This will not create a VAT cost to a business entitled to recover all the VAT charged.
Every supply in a chain, except those to an ‘end use’, will be subject to the reverse charge. Supplies to the ‘end user’ will be subject to VAT at the appropriate rate. ‘End users’ uses the services for any purpose other than making onward supplies of specified services, and includes someone receiving services to their own premises.
End users must provide a declaration to their suppliers which permits the charging of VAT, without this declaration the reverse charge applies.
The new rules do not affect supplies to non-VAT registered customers or zero rated contracts such as building new dwellings.
Businesses must consider:
* Reviewing customers, suppliers and contracts to determine their place in the supply chain and the appropriate VAT treatment;
* Assess which sub-contractors may be affected from a cash-flow perspective (many use VAT charged to fund working capital) and determine if payment processes should be amended to prevent sub-contractors struggling;
* Ensure supplies subject to the reverse charge are invoiced correctly, with the correct narrative;
* Update VAT codes to correctly account for the reverse charge and to feed information into the correct VAT return Box(es);
* A sub-contractor using the flat rate scheme may need to leave the scheme if they are entitled to VAT refunds. Monthly VAT returns could be beneficial for businesses in a VAT repayment position;
* Review legal documents to include reference to customer obligations and whether they are an “end user” for the purposes of the reverse charge;
* Upskill teams in accounts payable and receivable to the changes and their roles in ensuring organisations are compliant.
Armstrong Watson has a dedicated VAT team who are happy to help and advise on
the impact of the incoming changes.
Please contact Emma Forrester on 07887595494 or email emma.forrester@armstrongwatson.co.uk.
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