DELAYED INTRODUCTION: buying and selling construction services will be affected by new rules being introduced from 1 March 2021.

Contractors charging other contractors for qualifying services will no longer be required to add VAT to their invoices. Instead, they will notify the customer that they are liable to account for VAT on the supply received. Details of who will be affected by the new rules are explained in detail in our previous article.

Using this flowchart you can see how you would decide whether to apply normal VAT rules or apply the domestic reverse charge.

 

In this this article we aim to provide some more practical guidance for businesses that are affected.

Invoicing

When making a supply to which the domestic reverse charge applies, suppliers must:

  • show all the information normally required to be shown on a VAT invoice
  • annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT

The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

Tax points

For supplies spanning 1 March 2021 that are liable to the domestic reverse charge, the VAT treatment will be as follows:

  • for invoices with a tax point before 1 March 2021, the normal VAT rules above will apply, and you will charge VAT at the appropriate rate on your supplies
  • for invoices with a tax point on or after 1 March 2021, the domestic reverse charge will apply

Completion of the VAT Return

Suppliers

Suppliers of goods or services under the domestic reverse charge must not enter in box 1 of the VAT Return any output tax on sales to which the domestic reverse charge applies but must enter the value of such sales in box 6.

Customers

Customers must enter in box 1 of the VAT Return the output tax on purchases to which the domestic reverse charge applies but must not enter the value of such purchases in box 6.

They may reclaim the input tax on their domestic reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

Cash flow impact

This new provision potentially brings about a cash flow saving for contractors receiving services from subcontractors but conversely has potentially has detrimental cash flow impact for the subcontractors.

These new provisions will only apply where the customer of one contractor is another contractor.

That is to say, a contractor dealing directly with the party owning the property, whether they are a business such as a property developer or a private individual, will continue to charge VAT in the normal way.

The cash flow advantage accruing to contractors will therefore not arise for developers.

This is not altogether a bad thing, as many developers are partly exempt for VAT purposes and might not be able to claim back at least some of the output tax they would have to account for under the reverse charge.

Accounting for the change on Sage:
Sage 50cloud Accounts v26 will include new features to deal with the changes. All clients must be on 50C Subscription if they are using the software to deal with CIS.

A new tax code

Tax code T21 will be created, to be used where CIS Reverse Charge applies.

This tax code can be used by both the subcontractor and the main contractor and ensures that the VAT Return is updated correctly. If tax code T21 is already in use, the next available tax code is used for CIS Reverse Charge.

How will the tax code work?

Under reverse charge the responsibility for paying VAT to HMRC moves from the subcontractor to the main contractor. In most cases this VAT will be recoverable for the main contractor. When you use the T21 tax code, you only need to enter the net amount, the VAT calculation for the VAT Return completes automatically.

Standard VAT

When a subcontractor uses tax code T21 on an invoice for their main contractor, Box 6 of the VAT Return, total value of sales excluding VAT, will be updated with the net amount of the sale.

When a main contractor uses T21 to record their purchase from the subcontractor the net value of the purchase will affect box 7 of the VAT Return, total value of purchases excluding VAT, and the VAT value will affect boxes 1 and 4 of the VAT Return. The VAT is paid and reclaimed on the same VAT Return, this is often termed Notional VAT.

VAT Cash Accounting

VAT Cash Accounting rules do not apply to reverse charge transactions. So where reverse charge applies and the T21 tax code is used, the values from the invoice or credit will update the VAT Return not the payment or receipt as would be expected under VAT Cash Accounting.

Flat Rate VAT

Flat Rate scheme rules do not apply to reverse charge transactions. If the subcontractor or main contractor uses the Flat Rate scheme, they should account for reverse charge transactions outside of the scheme using tax code T21.

Invoices and credit notes

If the T21 tax code is used, then the invoice or credit note produced in sage 50cloud accounts will include the following text:

  • Invoice text – ‘Customer to pay output tax of £X to HMRC’
  • Credit note text – ‘Customer to account for output tax of -£X to HMRC’

More details

More detailed guidance can be found here: https://www.gov.uk/government/publications/vat-reverse-charge-for-building-and-construction-services/vat-reverse-charge-for-building-and-construction-services

If you require further advice on this point please contact Mitchells at: consult@mitchellsaccountants.co.uk or call us on 01246 274 121