The start of a new scheme for the way construction firms handle their VAT for certain kinds of services has been pushed back from October 2020 until March 2021 due to the Covid-19 pandemic.

The VAT Domestic Reverse Charge for Building and Construction Services means contractors will be required to pay the VAT directly to HMRC on the construction services provided by their sub-contractors. 

It’s an important change and one which businesses need to be fully aware of. It will make the process more complicated for firms employing sub-contractors but easier for the sub-contractor.

The deferment of the scheme, which is basically an extension of the current Construction Industry Scheme, will give companies additional time to understand and comply.

What does it mean?

The scheme will apply to transactions between VAT-registered contractors and their sub-contractors, with those providing construction services no longer being responsible for the VAT – that responsibility switches to the contractor.

It’s basically a major overhaul of the way VAT is paid on construction and building invoices and is seen as an important move to cut down on fraud in the industry. So, in simple terms, it’s the customer receiving the service who will need to pay the VAT directly to HMRC from March instead of paying the supplier, if they report under the Construction Industry Scheme.

Exclusion rules

There is an exception which is worth knowing about but, in order to comply, businesses must inform sub-contractors in writing that they are intermediary suppliers or end users in order to fulfill the requirement of being excluded from the reverse VAT charge scheme. 

This brings clarity and certainty in ensuring that both parties are left in no doubt whether or not the supply is excluded from the reverse charge.

Providing businesses follow this procedure and register their status, they will have the reassurance of knowing that they have headed off any potential challenge from HMRC.

HMRC says it is committed to identifying and tackling construction supply chain fraud and is providing support and guidance on the changes before they come in next March. It is hoped that by raising awareness now, everyone affected by the VAT Domestic Reverse Charge will fully understand what is required and not be caught out.

Clear as mud??

If you have any concerns or questions about the reverse charge, please give us a call on 01952 216872 or email us at info@kewaccountants.co.uk