Domestic Reverse Charge VAT for construction services has been delayed a second time until 1 March 2021 – But are you ready?
HMRC have recently announced that the implementation of the Domestic Reverse Charge (DRC) for construction services has been delayed a further 5 months until 1 March 2021 as a consequence of the coronavirus pandemic. This delay will provide much needed breathing room for businesses to prepare for these significant changes. Even with the delay, businesses need to understand the rules quickly. There is still less than 9 months to go and the new rules will apply to existing contracts that span the date of implementation.
What is the DRC?
In summary, the DRC will need to be applied by U.K. VAT registered customers (individuals or businesses) who receive certain building and construction services. In normal circumstances, it is the supplier of goods or services that charges and accounts for VAT. However, in a move to combat what is perceived to be widespread VAT evasion in the construction industry, customers will be required from 1 March 2021 to account for output VAT in relation to certain supplies.
Who is likely to be affected?
All VAT registered construction businesses are likely to be affected by the reverse charge. The changes will affect businesses which supply and/or receive standard or reduced-rate specified services that are required to be reported under the Construction Industry Scheme (CIS).
What supplies will the DRC apply to?
As stated above the supplies in question are those supplies that would generally be reportable by a contractor under the Construction Industry Scheme (CIS). There is, however, an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.
Certain services are specifically excluded from the DRC (e.g. professional architect, surveyor and certain consultants’ services).
Lastly, supplies to ‘end users’ or ‘intermediary suppliers’ will not be affected by the changes. ‘End Users’ are defined as consumers or final customers of building and construction services. An ‘intermediary supplier’ is either sharing a relevant interest in the same land where the construction works occur, or as being part of the same corporate group or undertaking (as per section 1161 of the Companies Act 2006). Therefore supplies between landlords and tenants will also not be impacted by the new rules.
How will these changes impact me?
Depending on the contractor’s position in the supply chain, the new DRC could have a significant positive or negative impact on cash-flow as suppliers will cease charging and collecting VAT in qualifying CIS reportable transactions. Such contractors will no longer have use of the VAT collected from customers between the date of receipt of payment and the date of the relevant VAT return. Affected contractors will need to plan their finances accordingly. At the same time, however, from 1 March 2021 purchasers of qualifying services will not be required to fund the VAT payable to the contractor and reclaim the amount through their VAT return.
What should I be doing now?
New and existing contracts should be reviewed carefully and any changes to these should be continually monitored throughout the period of the contracts and communicated to the supplier to ensure the correct VAT liability is applied.
Both suppliers and customers will need to factor any cashflow impact into affordability projections and ensure that all relevant staff are fully up to date with how the reverse charge will need to operate from 1 March 2021 onwards.
Affected businesses will also need to update their accounting systems and processes to enable the correct VAT position to be reflected in their records. All suppliers will need to have the appropriate procedures in place to allow them to verify the status of their customers, i.e. VAT and CIS registration of customers and whether they are the ‘end user’ or an ‘intermediary supplier’ (who are now required to communicate their status to sub-contractors in writing). Suppliers of relevant services are also required to comply with certain invoicing requirements to ensure it is evident and clear who is responsible to account for VAT under the DRC.
If you would like to discuss further in relation to your own position, please contact us or your usual A&M VAT adviser.
Useful HMRC Links
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
