New VAT rules for the construction sector start on 01 March 2021

The Government have announced that the new reverse charge rules for the construction industry will now take effect on 01 March 2021. These new rules, which were originally scheduled to start back in October 2019, have already been delayed twice as there was a lack of awareness of the changes in the industry.

The new ‘reverse charge’ system of VAT accounting will affect sub-contractors supplying their services to main contractors in the construction industry.

Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the new reverse charge system, the sub-contractor will not show VAT on their invoice to the main contractor and will not account for output VAT.

This is intended to ensure that VAT is correctly accounted for on supplies by sub-contractors, some of whom were allegedly not paying over the VAT charged to HMRC.
– It will only apply to individuals or business registered for VAT in the UK.
– It will affect individuals or business that supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

Preparing for reverse charge

• Checking whether the new rules of reverse charge affects the sales, purchases or both.

• Ensuring the accounting software/systems can deal with reverse charge

• Ensuring bookkeeper/staff who are responsible for VAT accounting have sufficient knowledge of reverse charge and how it will operate and

• Considering whether the change will have potential cash flow impact

Cash flow considerations

The implications on cash flow will be as follows:

For example, if you invoice another builder for £30,000 on 15th March 2021, you will no longer be able to charge £6,000 VAT. You would have collected £36,000 in March or April 2021 but not paid the VAT of £6000 to HMRC until 07 July 2021 (payment date of May 2021 VAT return). This has impacted your cashflow by £6000.00.

Monthly VAT returns could be an option if all your work will be subject to reverse charge. If all your sales are subject to reverse charge, it will put you in a VAT repayment position and opting for monthly VAT returns will speed up the input VAT recovery.

For further details and help

Please contact us if you are likely to be affected by these changes. We can work with you to ensure you are ready for the new system when it commences. If you are a sub-contractor using the VAT flat rate scheme, it may be beneficial to leave that scheme as you may be entitled to a VAT refund on your expenses from 1 March 2021.