1 March 2021 will see changes introduced which overhaul the VAT treatment for certain construction services in the UK. These changes had been due to come into force on 1 October 2020 but were delayed by HMRC for five months as a result of the impact the coronavirus pandemic has had on the construction sector.
VAT reverse charge for building and construction services
The changes will apply to transactions reported under the Construction Industry Scheme (CIS). Under the CIS, contractors deduct money from subcontractor’s payments and pass them onto HMRC, deductions which constitute advance payments for the subcontractor’s tax and National Insurance.
From 1 March, VAT registered customers receiving a service from another VAT registered business will need to pay VAT directly to HMRC, a move which prevents suppliers from charging VAT to their customers but failing to pay HMRC in turn. The reverse charge mechanism thereby makes the customer liable for accounting for VAT rather than the supplier, with the new rules aiming to combat fraud within the industry.
Preparation for business
Fortunately for businesses, which can be subject to penalties for submitting erroneous VAT returns, HMRC has announced it will “apply a light touch in dealing with related errors that occur in the first six months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.”
Affected business should get ready for these changes and minimise disruption by taking the following steps: checking when reverse charge should be used on sales and purchases, ensuring their accounting systems can cope with the reverse charge mechanism, considering any impact on cash flow and familiarising their VAT accountants with the changes.
Here to help
Based in Melton Mowbray, SRB Associates are always up to date with the latest HMRC guidance which allows us to provide professional bookkeeping and accounting services to business clients locally and nationally. If have any questions regarding VAT reverse charge for building and construction services, please do not hesitate to contact us via the contact form on our website or by giving us a call on 01664 503681.