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VAT Changes For The Construction Industry (CIS)

As if you hadn’t enough challenges running your own business. A major shake up of VAT is just around the corner so just a reminder of what is happening.

If you’re a subcontractor working in the building sector (normally operation under the construction industry regime) and you are VAT registered, this applies to you.

It’s called the ‘VAT Reverse Charge’ and was originally scheduled to start in 2019 but is actual starts next month (March 2021). This doesn’t leave alot of time to plan for the upcoming changes around how VAT is collected and paid within the construction industry.

How will these VAT changes work?

The VAT domestic reverse charge for building and construction services will apply from 1 March 2021.

Basically in the circumstances outlined below, you are supplying construction services to a VAT-registered customer then you will no longer have to account for the VAT. Instead, the customer will have to account for the VAT – a change that will seem very strange for most subcontractors affected.

This type of system does apply to mobile phone sales and some other nice areas but the construction industry scheme (CIS) is probably the largest implementation to-date.

So what does it mean and how does this ‘reverse charge’ work?

  • The reverse charge will apply to construction services in the UK, together with related materials, but not to materials supplied separately from any construction services (so if you supply mainly labour but then charge materials, it would apply);
  • It applies only to transactions that already fall under the Contruction Industry Scheme (CIS) and only where both the contractor and subcontractor are VAT-registered. Effectively the rules governing the CIS scheme are extended;
  • So for services provided by VAT-registered subcontractors to VAT-registered contractors, they will require the contractor (customer) to handle and pay VAT over directly. This applies to both standard and reduced-rate supplies but not to zero-rated supplies;
  • The subcontractor will receive payment for the work and materials, less any CIS, but no VAT will be paid over. Contractors will need to make sure that their subcontractors are familiar with the new rules, and ensure that their accounting systems will be able to handle this change to the VAT process. (Please feel free to contact us at support@accountingandbeyond.co.uk if you have any queries);
  • Subcontractors will need their contractors (customers) to let them know whether or not they are end users or intermediary suppliers (as the domestic reverse charge will not then apply if they are intermediary suppliers);

What do contractors need to do on their VAT Returns?

Contractors need to enter the calculated output tax (sales times either the standard or reduced VAT percentage) in box 1 of the VAT Return.

There should be no entry of the value of these purchases in box 6.

They may reclaim the input tax on their domestic reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

The net effective is that the output tax value less the input tax value should be £Nil.

What do sub-contractors need to do on their VAT Returns?

Basically not much except they must enter the value of the net sales in box 6.

No other entries should be made.

HMRC Guidance and Flowcharts

The links below give you a good overview of how VAT will work under the new rules, depending on whether you’re a buyer or a supplier in the chain:

Flowchart for buyers
Flowchart for suppliers
Talk to us about preparing for the VAT reverse charge

Sub-Contractor Cash Flow Challenges

As a subcontractor, you may experience cashflow challenges from 01 March 2021 and that could be bad news for the financial health of your business especially at this difficult time.

Unfortunately you will no longer be able to put the VAT you’ve collected into your business account and use that to aid your cashflow until it’s paid over as part of the normal VAT cycle. At the same time, affected contractors will no longer need to fund the VAT paid to subcontractors and then reclaim this through their VAT returns later.

This is a big change and one that hasn’t been hugely publicised given the Covid and Brexit issues.

Planning for this outcome is therefore vital where it may influence your cash flow.

If you need any help and assistance please do not hesitate to contact us as support@accountingandbeyond.co.uk or call our office on 01438 532230.

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