Are you prepared for the new VAT reverse charge for the construction industry?

This year has been challenging for many businesses, and the impact of the coronavirus pandemic has been keenly felt by the construction industry. But it is important to keep on top of future plans, particularly with the delayed VAT reverse charge rules for the construction industry are set to come into force in March 2021.

The new reverse charge rules mean that it will become the responsibility of the suppliers of construction services to account for the VAT that would have previously been charged by their subcontractors.

The aim of the measures is to combat fraud in the sector as HMRC feel that many sub-contractors fail to pay the VAT they collect from their customers.  The new rules will come into force in March 2021.

There are a number of businesses that will not be impacted by the changes.  Most notably, the reverse charge will not need to be made by ‘End Users’.  Instead, contractors making supplies to ‘End Users’ will charge VAT in the traditional way.  ‘End Users’ are customers that receive the supplies of construction but do not make an onward supply of construction services themselves (developers may be an example).

However, there are concerns from a VAT perspective on the reverse charge, for example, how a contractor can determine that its customer is an ‘End User’ for the purposes of the scheme and the responsibility of ‘End Users’ to declare their status.

VAT reverse diagramIn addition, the rules concerning the VAT liability of construction services are complex and will now effectively be determined for the entire supply chain of contractors by the contractor providing the services to the eventual ‘End User’. Many commentators have also voiced a concern that contractors will lose the cash flow advantage gained from being paid before having to account for VAT on a VAT return.

From an accounting and business perspective, the issues are perhaps more practical in terms of changing accounting systems so that sub-contractors do not account for VAT, and the contractor’s systems account for the reverse charge.

With the impact of the end of the Brexit transition period and the economic challenges brought on by the coronavirus pandemic, it would be wise for businesses in the construction sector to start planning now, to ensure that they will be ready when the new rules come into force.

Our expert team is on hand to ensure that your business is prepared for the new VAT reverse charge. For help and advice, contact us today.