What does the VAT Reverse Charge mean for subcontractors?
With effect from 1st March 2021, an individual or a business supplying construction industry services to a VAT-registered customer will no longer account for VAT. This responsibility will instead fall on the customer, on a ‘reverse charge’ basis. That is, the customer will account for the VAT but will also, where applicable, recover the VAT.
A subcontractor must use the reverse charge from 1 March 2021 if:
· They are VAT registered in the UK
· They supply standard or reduced-rate building and construction industry services
· Their customers are UK VAT-registered
· Payment for the supply is reported within the Construction Industry Scheme (CIS)
· They are not an employment business, supplying staff and/or workers
· Their customer has not given written confirmation that they’re an end user or intermediary supplier
VAT Reverse Charge checklist for subcontractors
Government guidance advises that subcontractors check the following:
To complete the check, the following details are required:
· Unique taxpayer reference
· National Insurance number
Partner in a firm
· Firm’s name
· Partner’s name
· Firm’s unique taxpayer reference
· Partner’s unique taxpayer reference, or National Insurance number – if the partner is an individual
· Company’s unique taxpayer reference or registration number – if the partner is a company
· Company name
· Company’s unique taxpayer reference
· Company registration number
Bear in mind if using the above link, that customers who are contractors for CIS purposes may not show up through the CIS online service. If this is the case they either need to confirm that they are end users or intermediary suppliers, or ask whether they report under CIS before applying the reverse charge.
3. Decide if the reverse charge will apply by reviewing all contracts, then tell your customers.
4. Request confirmation from customers as to whether they are an end user or intermediary supplier.
What are the implications of the VAT Reverse Charge for subcontractors who supply construction services?
The gross value of payments coming into a subcontractor’s business will be reduced because customers will no longer be paying VAT to the subcontractor. The opportunity to use VAT to fund cashflow will therefore simply no longer exist so subcontractors will need to plan carefully for the impact on day-to-day cashflow, and monitor this closely post 1st March 2021.
The onus will shift from the subcontractor to the contractor to determine the rate at which VAT should be charged for the construction services, if it is to be used at all. Subcontractors will need to check that their finance systems can record the reverse charge and ensure invoices show that it applies, indicating to customers that they should no longer pay you any VAT.
No receipt of VAT on sales means a subcontractor may make net repayment claims to HMRC. Subcontractors should therefore decide whether to move to monthly returns.
What are the implications of the VAT Reverse Charge for contractors who buy construction services?
It is important for both suppliers and customers to understand their responsibilities under the new VAT Reverse Charge legislation.
Crucially, a customer will only be liable to account for VAT where it makes an onward supply of the same construction services. In this case, instead of paying VAT to their supplier, the customer must account for VAT at the appropriate rate on its VAT return. This can be recovered as input tax, subject to the normal rules. In the usual cases where the customer is a fully taxable business, this would result in a nil net tax position with no VAT due to HMRC. This ensures the complete removal of any risk that HMRC will provide credit for VAT never received.
As well as providing accurate information to suppliers confirming contractor - rather than end user – status, customers will need to ensure their suppliers don’t incorrectly charge VAT on their supplies and services. Contractors therefore need to consider what processes they will put in place to ensure accuracy and compliance.
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