From 1st March 2021, a new VAT exemption is being introduced by HMRC. This rule applies to businesses in the construction and building sectors.
Firstly, this doesn't have any impact on the existing CIS scheme for contractor payment deductions.
Many construction businesses use the CIS scheme to account for tax and National Insurance deductions from contractors' gross pay or self-employed tradespeople. This new VAT system doesn't change that.
Let's run through what this new VAT accounting system means - and what you need to do if you supply services, or buy them from other businesses.
Summary of CIS VAT Reverse Charges
In essence, this new system means that construction industry businesses don't always need to add VAT to their invoices or pay it to subcontractors.
The idea is to streamline the system and avoid multiple different companies in the same supply chain, paying and declaring VAT on services rendered to the same end-user, to HMRC numerous times.
From HMRC's perspective, the core aim is to reduce frequencies and exposure to VAT fraud.
HMRC defines the businesses in that supply chain as intermediaries. Therefore, if you are buying services from a sub-contractor for a construction project, then you won't need to pay the VAT on those services - but you will, in turn, charge VAT to your end client, and pay that value over to the revenue.
General conditions when this applies:
- The payment is reported within the CIS scheme.
- Transactions take place after 1st March 2021.
- Both businesses or contractors are VAT registered.
- The goods or services being supplied are at standard VAT rates.
- Invoices are for services, or for goods supplied alongside applicable services, not for staff.
Illustration of the New CIS VAT Scheme
Here we'll run through a theoretical example of how the scheme might look in action!
Under the existing VAT system, if you are a property developer, and subcontract out the roofing work to another firm, if the total cost is £10,000, your subcontractor will add £2,000 to their invoice for the 20% VAT.
You pay £12,000 in total, claim back the £2,000 output VAT on your next return, and your subcontractor declares the £2,000 input VAT, and pays it over to HMRC next time they file.
The £2,000 doesn't have any net impact on any business, since it is claimed back or paid to HMRC, but it does mean that the same VAT value circulates through the system and creates additional work for HMRC and the businesses.
From 1st March 2021, provided all the conditions are met, your subcontractor will charge you £10,000 for the services, without any VAT element. Their invoice needs to state that the CIS reverse charge applies.
If the roofing subcontractor pays £3,000 for the raw materials solely for goods from a trade supplier, they will still pay VAT as normal and claim it back through their VAT return.
You, as the contractor supplying the end-user, then need to account for the 'reversed' £2,000 VAT element at both an input rate and output rate of £2,000 - even though you haven't paid this value to your subcontractor.
This offsets the VAT and means that there isn't a VAT balance payable on the transaction - and has the benefit of reducing your cash flow burden by bringing down the initial outlay by 20%.
When you finish the project and are billing the end client, you add the 20% VAT as usual and pay this to HMRC alongside any other input VAT received, less any additional output VAT claimed back on expenses.
The roofing subcontractor does not need to account for any VAT on any part of their VAT return for the subcontracted work carried out and just includes the net values.
When Does the CIS VAT Reverse Charge Apply?
There are lots of conditions for reverse charging to take effect. It only applies to B2B transactions, and the recipient of the services is responsible for accounting for their subcontractor's output VAT. I.e. you need to declare your subcontractor's £2,000 input VAT and your own £2,000 output VAT on the example above.
Relevant services and accompanied charges for goods must be for onward use in the construction business, and so invoices to an end-user must still account for VAT in the usual way.
VAT exempt goods or services are not affected, and any supplies not covered by the Construction Industry Scheme are also excluded.
If a customer is not VAT registered, is an end-user or won't be using the goods for an ongoing supply to an end-user, then the reverse charge doesn't apply.
Key businesses that will be impacted include:
- Subcontractors who sell construction services to contractors for building projects for an end-user.
- Contractors who supply materials alongside their services, or provide partial services towards larger construction projects.
There will also be lots of changes to businesses who are CIS registered. For example, they will need to update bookkeeping systems, amend their VAT reporting software, and train staff on how and when the reverse charge applies. Some businesses might need to register for VAT.
Any transactions that are entered into your accounts on or after 1st March 2021, or are entered before 1st March but fall payable after 1st June 2021, fall into the remit of the new VAT reverse charge.
Please contact SAS Accounting if you need any assistance with:
- Understanding whether, and how, the CIS VAT Reverse Charge will impact your business.
- Updating your bookkeeping software to account for the changes.
- Recognising which transactions are eligible, and which are not.
Our teams are on hand to guide you through the updates to the CIS VAT scheme. We are always available remotely for consultations and digital bookkeeping services throughout the current lockdowns and beyond!