REVERSE CHARGE VAT- 01.03.21
VAT changes will take place on 1 March 2021 that will affect all VAT registered builders who work for construction industry clients.
A lot of people working in the construction industry are still unclear of what they need to do, and we are helping client here at Brotherton’s with all the issues and questions they have.
ONWARD SUPPLY TO ANOTHER TRADER.
The rules for the reverse charge apply if a subcontractor is working for a main building contractor on a specific project. The customer must be registered for the Construction Industry Scheme (CIS) and the work in question must come within the scope of the CIS scheme. All work, both 20% and 5% work are applicable here. However, the main condition for the reverse charge rules to apply in a particular circumstance, is that the business receiving the supplies from the other builder must be making an onward supply of those services to another customer.
MAIN CONTRACTOR – END USER OR INTERMEDIARY SUPPLIER
It must be ascertained if the main contractor is classed as either an ‘end user’ or ‘intermediary supplier’ for the services in question: If they are classified as either of these two things, then normal rules would apply on that project and VAT would be charged as normal. It is only when the main contractor is making an onward supply of those services to another customer that the reverse charge rules will be applicable on a particular project.
So, we can see it is important to understand the definition of END USER and INTERMEDIARY SUPPLIER.
END USER
End user: This would be relevant if the work being done is not relevant to an onward supply of construction services made by the main contractor. For example, it might relate to building work carried out at its own head office and not for one of its customers buildings or sites. In this situation, the onus is on the main contractor to advise the sub-contractor that it is an ‘end user’ for that particular job. The sub-contractor will then charge 20% VAT on his invoice in the normal way.
INTERMEDIARY SUPPLIER
This is a business that is registered for both CIS and VAT and is connected or linked to end users. The connection is based on Companies Act 2006 s 1161; (the two entities are in the same corporate group or undertaking). A link will exist if both the intermediary supplier and end user have a relevant interest in the same site where the building work is taking place. This may be where the relationship is such as a landlord and tenant relationship. In this situation, even though the intermediary supplier is making an onward supply of construction services to the end user, the supplies it receives from other builders will be subject to normal VAT rules rather than the reverse charge. So again, the sub-contractor builder will charge VAT as normal.
So, we can see the main thing to identify, is who we are selling to as a sub-contractor and what their relationship is to the overall project. We have had clients saying to us that this will be difficult to ascertain in certain circumstances. However, it is the customer that is responsible for notifying the sub-contractor of their relationship to the project.
CUSTOMERS RESPONSIBILITY
The customer receiving building services must always notify the supplier in writing of the end user or intermediary supplier situation. In HMRC’s guidance, they suggest that the supplier should include a statement in the terms and conditions of a contract along the lines of: ‘We will assume you are an end user or intermediary supplier unless you say you’re not.’ The builder supplying services is therefore adopting a cautious approach of charging VAT on all invoices unless the customer says otherwise.
As soon as your customer notifies you they are not the end user or intermediary supplier and there is a onward supply to another trader, then you will have to reverse charge and apply the new rules.
IF YOU ARE THE MAIN CONTRACTOR- PROCEED WITH CARE-
It is important that if you are the customer of other building services which are covered by these rules it is crucial the customer deal with this situation properly. If they are for instance, working on a project that is an onward supply and they are charged vat incorrectly by a supplier on that work the sub-contractor provides, then HMRC could argue that they need to assess this work under the proper reverse charge rules and will then potentially assess them on the reverse charge rule basis, leaving them with a double VAT charge. So, if you are a contractor buying in sub-contractor work from other builders, make sure you notify the sub-contractor of your status and if there is an onward supply the vat registered sub-contractor should reverse charge their services and not charge you vat. You will then account for the vat on your tax return.
INFORMATION TO BE INCLUDED ON A REVERSE CHARGE INVOICE
The information is the same as for a normal sale invoice;
However, the invoice must make it clear that the reverse charge applies. The amount of VAT to be accounted for by the customer on their VAT returns should be clearly shown, either as a total figure of £X or the VAT rate that applies to the job. The latter approach is useful if an invoice includes work subject to different rates of VAT. Wording such as: ‘Reverse charge – customer to pay the VAT to HMRC’ should be prominently recorded on the invoice.
GOODS included in the supply.
Where goods and building materials are provided together with construction services and in the course of the construction work, then the reverse charge also applies to these goods. There are likely to be cases where it may be very difficult to determine if there is a separate supply of goods that is excluded from the reverse charge, or whether they are to be included as part of a single supply of construction services. In these cases, a business will need to consider the position further to ensure the correct VAT treatment.
Lots of people have been calling the office for help with this and we are here to help anyone concerned with how to apply the new rules. Please call- 01527 433 111 or 0121 289 4433
