VAT reverse charge? Sounds like a good thing… but actually is a bit of a complication.
The VAT reverse charge comes into effect on 1st March 2021 and applies to most supplies of building and construction services.
But don’t fret just yet, it only applies to transactions that are reported under the CIS and that are between VAT registered contractors and sub-contractors. So, if you are not VAT registered, don’t worry, and if you don’t deal with VAT registered traders, don’t worry. Also, if the services aren’t covered under CIS, again… don’t worry…. That must be nice!
But a word of caution, you may deal with customers who are VAT registered without realising. If there is any doubt, you should always ask the customer whether they are VAT AND CIS registered. If your customers are usually not registered for these schemes, then you can include a statement on your terms and conditions to say something like; you will assume they are an “end user” or “intermediary supplier” (this means the reverse charge will not apply) unless they say they are not. Both options place the responsibility on the customer.
For the rest of you however, here we go…
HMRC advises that if the reverse charge will affect you there are a few things you need to do:
- Make sure your accounting systems and software can deal with the reverse charge.
- Make sure the staff responsible for recording and accounting are familiar with the VAT reverse charge and how it will work.
- Consider whether this change will impact your cashflow.
Now, taking that last point first, as a sub-contractor where the reverse charge applies, your customers will no longer be paying you VAT on your services. As much as this does take the headache of you paying VAT to HMRC away, it does however impact your cashflow. You will need to seriously consider the impact this cashflow will have on your business. In essence, if you pay your VAT quarterly, for the 3 months leading up to your VAT payment, you will be receiving 20% less of your income, then when the VAT payment comes around, it will be that much smaller, if non-existent.
HMRC have published a few helpful guides on showing you when to use the reverse charge:
As well as a very helpful Flowchart to determine if to use:
VAT on Sales
This bit is simple, for any sales where the reverse charge applies, you must not put VAT. You must ONLY put the NET amount.
VAT on Purchases
Again, simple, for purchases of services under the reverse charge you MUST enter the VAT amount, same as you would for normal VAT rules.
If the VAT reverse charge applies, suppliers must (1) show all the information required for a VAT invoice, (2) make a note, and MAKE IT CLEAR that the reverse charge applies and that the customer is required to account for the VAT and (3) CLEARLY state how much VAT is due or AT LEAST the VAT rate if the amount is not available, but the VAT is NOT included in the amount charged to the customer. HMRC have provided a helpful example on their website around this.
Now I am going to just quote HMRC direct from their website for this bit:
“HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in
dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.
Any errors should be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.”
Some areas to take not of:
“THE FIRST 6 MONTHS”, this gives you until the end of September to get used to this!
“TRYING TO COMPLY WITH THE NEW LEGISLATION”, you must be able to PROVE that you are doing what you can and that any errors are simply mistakes.
“ERRORS SHOULD BE CORRECTED AS SOON AS POSSIBLE”, don’t leave things build up, or even worse, write them down and never find that piece of paper again. If you spot a mistake, deal with it there and then. Even if it is a headache!
Accounting systems or software
HMRC expect you to have systems in place to be able to cope with the reverse charge. For anyone VAT registered you should already be using accounting software in order to comply with Making Tax digital regulations. Please ensure you are using accounting software that is compatible with both Making Tax Digital and VAT reverse charge regulations.
Also, training for staff (or yourself if applicab
le) in using this software or at least the understanding of this change is essential to be able to seamlessly enter this period.
I cannot stress enough how easy to follow and read the HMRC flowchart on whether to apply the reverse chart or not, as well as how to layout your invoices if it applies, are. They are vital tools to be able to use for this.
I hope this has been somewhat useful. The information you need can be found on HRMC’s website if you search for “VAT reverse charge”. If you need a hand with somethings, please feel free to contact us.
Thanks for taking the time to read and stay safe everyone!