Reverse charge VAT rules coming soon
Jan 13, 2021
It has already been delayed twice, but despite the ongoing difficulties caused by the Covid pandemic the VAT domestic reverse charge is still set to take effect from 1 March 2021.
Originally VAT domestic reverse charge (DRC) was going to come into effect in the construction industry from 1 October 2019. It was then delayed until 1 October 2020, and last summer it was pushed back a further five months until 1 March 2021. Unless there is another last minute delay, the VAT DRC will now begin in only a few weeks.
Many larger construction firms are already prepared, but for smaller firms the complex rules may prove harder to understand and implement. The new VAT rules will impact on accounting for VAT for transactions, and it will affect sub- contractors supplying their services to main contractors in the construction sector.
Under the new DRC 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.
The new reverse charge will apply to a wide range of services in the building trade, primarily those activities covered by the construction industry (CIS) payment rules. Note that normal VAT invoices will continue to be issued to domestic customers.
HMRC has released comprehensive guidance on the new rules and when they apply. There are two helpful flowcharts available to decide if you need to use the reverse charge, one is for suppliers and one is for buyers.
Please contact us if you are likely to be affected by these changes and we can work with you to ensure you are ready for the new system when it starts. 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.