25 February 2021
What is domestic reverse charge for VAT?
If you are registered under the Construction Industry Scheme and for VAT then the way you account for your VAT will change. If you are supplying construction services to a VAT registered customer, you will no longer have to account for the VAT on your own VAT return but instead your customer will have to account for it on theirs. So in simple terms, if you are a subcontractor, your contractor will have to handle the VAT element and pay it directly to HMRC in the same way they would your CIS deductions.
Do all services come under the new rules?
If you are supplying standard or reduced rate supplies, you will need to follow the new rules however if you are providing a zero rated service (for example, if you’re working on a new build project) then the old rules will apply.
Why have these changes come into place?
HMRC have brought in these rules as an anti-fraud measure following various examples of construction businesses charging VAT on their invoices but then not paying it over to HMRC so essentially keeping the VAT that wasn’t theirs in the first place. Therefore HMRC believe that if they change the responsibility and move it down the supply chain that it would prevent this from happening going forward.
So, what do you need to do?
- You will need to see if your construction services come under the scope of the scheme - a list can be found here as some services are exempt from the new rules.
- Evaluate who your customers are - for example, if you are registered for CIS and VAT but your customers are purely home or domestic users then the domestic reverse charge rules can be ignored. The scheme only applies to VAT registered businesses registered for CIS.
- Decide whether you are a subcontractor or contractor.
Subcontractors
For VAT registered subcontractors very little will change for you as you will charge your VAT as normal. However when your contractor pays you, you will need to reconcile your payments slightly differently as if your contractor is VAT registered, they will withhold the VAT charged and pay it to HMRC on your behalf. This will affect your cash flow as rather than holding the VAT amount until you submit your quarterly VAT return, you will not receive it.
Contractors
Contractors will be paying the VAT charged from your subcontractor to HMRC on their behalf instead of paying it to them. In this case, this will benefit your cash flow as you haven’t had to pay the VAT amount to your subcontractor and the amount you originally would’ve claimed back is offset against the amount you pay HMRC so should have no impact on your amount due on your VAT return.
What do I need to do with my bookkeeping records?
At Haines Watts, we believe the best way to do your bookkeeping is on cloud accounting software. Various software providers have released product updates to make this change easier from a bookkeeping point of view and make sure you get it right first time. We can help you choose the right software for you and your business and help you get set up, provide training and support so you know what to do and when. Give us a call on the number below or drop us an email to eastanglia@hwca.com and we can discuss your requirements and a package bespoke to you.
