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Are you a VAT-registered sub-contractor? If so, then from 1st October 2020, you will no longer charge VAT on certain construction services. Instead, your customer will ‘self-account’ for any VAT due. It’s called the Reverse Charge.
Why the change?
The government is introducing this Reverse Charge to tackle ‘missing trader fraud’. This is when unscrupulous people form construction companies and deliver services. Instead of paying to HMRC the VAT they’ve charged their customers, they close the business and disappear … with the VAT they collected from their customers.
The Reverse Charge rules will put an end to VAT flowing around the supply chain. It will only crop up now when it reaches an ‘end-user’ or private individual.
The current rules
As a VAT-registered subcontractor, providing construction services, then the following VAT rates currently apply
- 20% standard rate
- 5% reduced rate (for specific conversions and renovations)
- 0% zero rate (for particular new-build residential work)
You’ll be charging the appropriate rate of VAT to your clients, who will, if they’re entitled, recover it.
Which construction services will be affected by the Reverse Charge?
In brief –
- Demolition or dismantling of buildings or structures – including offshore installations.
This list isn’t exhaustive. Call us on 01908 978500, and we’ll tell you whether the Reverse Charge applies to your particular building or construction activity.
What happens to work I carry out that spans 1st October 2020?
In these cases, it depends on the ‘tax point’ of the services- whichever of these is earlier
- Date of issue of the VAT invoice
- Date of payment
Where the tax point is before 1st October 2020, the standard rules will apply. Where the tax point is on or after 1st October 2020, then the Reverse Charge will apply.
How do I show the Reverse Charge on invoices?
The invoice will show the sale as zero-rated. You’ll need to add specific wording to highlight that the transaction is under the Reverse Charge e.g.
‘Reverse charge: Customer to pay VAT to HMRC.’
How about my VAT return? What happens there?
You’ll enter the sale in box 6 of the return. No output VAT will be charged or shown in box 1.
What should I be doing to prepare for the Reverse Charge?
- Make sure that your bookkeeping software can cope with Reverse Charge transactions. And remember, your business may be both a customer and supplier of construction services at times.
- Make sure your invoices comply with the new rules
- To check whether the Reverse Charge applies or not, HMRC recommends that suppliers check the VAT and CIS status of their customers
- If you are an ‘end-user’, you may need to provide evidence of this to the construction business supplying you. It’s good practice to have this documented in writing between both parties
- Last (but definitely not least!), talk to us. We specialise in supporting businesses in the construction sector and, as always, we’re here to help.
How we’ll help
We’ll discuss your specific circumstances with you. Our software is geared up to handle all aspects of your bookkeeping and accounting needs. Our main message is – don’t ignore the changes. They will come, and you will need to make adjustments to your invoicing processes.
For that all-important peace of mind, just get in touch.
Remember – we’re here to help