Important VAT changes are coming to the construction and property sector from 1 March 2021. The Construction Reverse Charge is being introduced, changing who is responsible for accounting for VAT in relation to certain supplies.
But what does this mean? AAB's Alistair Duncan, Indirect Tax specialist at AAB, hosted a Q&A on LinkedIn answering the most important questions surrounding the change. We've summarised the questions and answers below.
What is the VAT change that is impacting property and construction businesses from 1 March 2021?
From 1 March 2021, the obligation to account for VAT on certain construction services will pass from the supplier to the customer. This will predominantly apply to supplies between sub-contractors and main contractors and will cover a broad range of construction services, including those of builders, joiners, electricians, plumbers, painters, air conditioning installers and many ground workers.
We have been hearing about this change for a number of years but is has been postponed twice. Won’t it just be postponed again?
Although it was originally scheduled for 1 October 2019, the implementation was delayed for a year to give construction businesses more time to understand the changes. The October 2020 implementation was further delayed due to the COVID pandemic. However, HM Revenue and Customs has confirmed that the 1 March 2021 implementation date will go ahead.
So what are the new rules?
The new rules are closely aligned to the current Construction Industry Scheme (CIS). Where a supply is:
- Within the scope of and the payments due are reported under CIS;
- Subject to VAT at the standard or reduced rate;
- Supplied to a VAT registered customer; and
- Not supplied to an “End User”,
the reverse charge applies. Otherwise normal VAT rules apply.
If I only make zero rated supplies, am I caught by the new rules?
The new rules only apply if the supply is subject to a positive rate of VAT. Consequently, contractors who only work on projects for new build housing will not be caught. For refurbishment, mixed use or commercial projects, the new rules are likely to apply. Where invoices are issued that are covered by the reverse charge, a statement such as “Reverse Charge: VAT Act 1994 Section 55A applies, Customer to pay the VAT to HMRC” should be shown on the sales invoice to differentiate from zero rated supplies.
What is an “End User”?
The reverse charge only applies where you make an onward supply of the building and construction services. If you are a private consumer or the final customer, you are an “End User” and you should be charged VAT as normal. This included intermediary suppliers who are linked to the end user who onward supplies the services with no material change to the supplies. End users have an obligation to make a written notification of their status to their suppliers.
What if my sub-contractor charges me VAT after 1 March 2021?
Where VAT has been incorrectly charged on supplies subject to the reverse charge, it is necessary to challenge the position. HM Revenue and Customs (HMRC) would not permit input VAT recovery on such incorrectly charged VAT. In addition to disallowing the input VAT, HMRC may also seek to levy interest and penalties. Consequently, unless you are able to certify that you are an End User, any VAT charged on payments falling within the CIS should be challenged.
Where can I find further information to help me prepare my business?
We have prepared a document that summarises and explains the new rules. You can view this here.
If you have any further questions, please contact Alistair Duncan or your usual AAB contact.
You can find out more about AAB's dedicated Construction & Property team here