New Reverse Charge VAT rules for the Construction Industry effective March 2021
The Government have announced that the new reverse charge VAT rules for the construction industry will now take effect on 1 March 2021.
The reverse charge rule effects the way in which VAT is collected. Instead of charging VAT on sales invoices and receiving payment from the customer then paying the VAT over to HMRC, the VAT will instead be paid straight to HMRC by the customer receiving the service.
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 the reverse charge
Make sure that you are ready for this change, by preparing in the following ways:
- checking whether the reverse charge affects either your sales, purchases or both,
- making sure your accounting systems and software are updated to deal with the reverse charge. We highly recommend Xero software as this is compatible (Please contact Alex Graham if you would like us to set up a Xero account for your business),
- considering whether the change will have an impact on your cash flow, and
- making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate.
Cash flow considerations for reverse charge
Considering your cash flow at this time is very important, the implication on cash flow will be as follows:
For example, if you invoice another builder for £50,000 on 31 March 2021, you will no longer charge £10,000 VAT which you would have probably collected in April 2021 but not paid the VAT to HMRC until 07 August 2021 (payment date of June 2021 VAT Return).
Also, 31 March 2021 is the VAT deferral payment deadline, so if you deferred your VAT payment during the coronavirus pandemic it will be payable by this date, therefore you will need to factor into your cashflow, paying this liability as well.
Monthly VAT returns could be an option if all your work will be subject to the reverse charge; putting you in a VAT repayment position, to accelerate input tax recovery on your expenses.