Domestic Reverse Charge VAT is being introduced on March 1 2021 and will apply to supplies of construction work from this date. It represents a change in the way CIS registered construction businesses handle and pay VAT. Effectively, it means that the contractor at the top of the chain will pay the VAT over to HMRC. In the latest article from Caroline Streatfield Bookkeeping based in Eastbourne in East Sussex, we look in more detail about why it has been introduced, what it means for your business, the impact it might have and how you can minimise the effects on your cash flow.
Why has Domestic Reverse Charge VAT been implemented?
It was initially due to start in October 2019 but has been delayed due to Brexit and the pandemic. This procedure has been set up as an anti-fraud measure to stop companies receiving high net amounts of VAT from customers, which then doesn’t get paid to HMRC, as they have no intention of paying it. The reverse charge is thereby a mechanism for accounting for VAT with the customer charging themselves the VAT, rather than the supplier charging it. This means it is the customer’s responsibility, eradicating the opportunity for the supplier to disappear without paying VAT to HMRC.
Main points of Domestic Reverse Charge VAT
- The reverse charge only applies between the two VAT registered businesses within CIS and so does not affect invoices to the general public
- It applies to the whole amount, including services and materials
- The reverse charge needs to be applied to invoices issued to contractors, unless they have given written notice to you confirming that they are the end user (for example, there is to be no onward supply to the public)
- Invoices to contractors need to include a note stating, ‘Reverse Charge VAT Act 1994 Section 55A Applies’ with the amount of VAT charged
- This has to be stated but is not shown as a charge on the invoice or included on any VAT returns
- Invoices relating to Reverse Charge VAT need to be entered on the invoice date or the date the payment is received, whichever is earlier
Make sure you reduce the impact on your cash flow
You may have a cash flow problem if the majority of your work involves working as a subcontractor for larger contractors. This is because you will have to wait for the VAT quarter to come to a close in order to reclaim VAT on materials, as you have not received the 20% VAT on sales. If this is the case, we suggest it might be more beneficial to move to monthly VAT returns. However, as a contractor, you could have a short-term cash flow benefit.
What it will mean for your business
The approach you take will require a significant change and staff will need to be trained to identify relevant CIS contracts and end users.
- Accounting and bookkeeping systems will need to be modified for new invoicing and reporting obligations
- It may not be possible to use the VAT Flat Rate Scheme and Cash accounting
- Businesses that are recipients of the supply may need to register for VAT
- Those at the start of the supply chain may become VAT repayment claimants
- Filing monthly VAT returns should be given serious consideration
How can Caroline Streatfield Bookkeeping help you with Domestic Reverse Charge VAT?
VAT of any description often conjures up feelings of dread and particularly any changes to the way it is collected. The new method of collecting VAT is not straightforward. However, with the right advice, and working with a bookkeeping company that understands it, you should be able to come through the process relatively unscathed and minimise the effects on your cash flow. It is crucial that your business is prepared for the new way of paying VAT. If you need help with your Domestic Reverse Charge VAT, why not talk to the experts at Caroline Streatfield Bookkeeping? We work with a lot of businesses who are required to operate CIS. For more information, call Caroline on 07982 682746 or 01323 885205 oremail info@bookkeepereastbourne.co.uk
