HMRC are changing the way builders charge VAT
From 1st March 2021 HMRC is changing how it collects VAT on some construction services, known as The Domestic Reverse Charge.
Under current rules, a builder charges VAT to their customer, collects the VAT on top of their payment and accounts for it in Box 1 on their VAT return.
This is changing for supplies between VAT-registered builders.
Effectively if the customer is a VAT registered builder then, as a VAT registered sub contractor, you will not charge them VAT or receive a payment of VAT from 1st March 2021 onwards.
If your customer is the end client (i.e. Mr & Mrs Smith, domestic customer) then you continue to charge VAT at 20%.
If your work is zero rated then the normal VAT rules will continue to apply.
Reason for change
HMRC has identified that certain builders have been prone to VAT fraud, where the supplier charges VAT to his customer, receives money for this VAT from the customer but never declares it on a VAT return.
The new procedures aim to prevent this from happening because the supplier is never paid VAT in the first place.
Mike is an electrician, VAT registered as a sole trader. He is doing some work on an office block, invoicing the main contractor Steve, for his work.
Steve is also VAT registered, and will then invoice the building owner. Steve is not an “end-user” because he is making an onward supply of construction services to his own customer. He is an “intermediary supplier”.
The invoice raised by Mike will be subject to the new procedures, ie no VAT is charged. Let’s say the value of his work including materials will be for £5,000:
Mike’s VAT return will only include the value of the sale in Box 6 (outputs) of his VAT return:
- Box 6 – outputs – £5,000
Steve will do the reverse charge calculation and make the following entries on his return:
- Box 1 – output tax £1,000 (ie £5,000 x 20%)
- Box 4 – input tax – £1,000 (same figure as Box 1)
- Box 7 – inputs – £5,000 (net value of payment made to Steve)
Other issues to consider
Taking the Steve and Mike example a stage further, they each have their own responsibilities with the new rules.
Mike must ensure that Steve is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number.
Mike must also specify on his sales invoices the amount and rate of VAT that Steve must declare with the reverse charge ie 5% or 20% VAT.
Mike should include wording on the sales invoice along the lines of: “Reverse charge: customer to pay the VAT to HMRC.”
Steve must tell Mike if he is an “end-user” or “intermediary supplier”. If he is an intermediary supplier, then Mike will not charge him VAT because the reverse charge applies.
It is important that Steve does not pay VAT incorrectly to Mike because HMRC could raise an assessment for the VAT that he should have declared, ie as if the reverse charge had been done correctly.
Penalties issued by HMRC for errors
HMRC has confirmed that penalties will not be charged for mistakes with the new procedures, the exception being if “you are deliberately taking advantage of the measure by not accounting for it correctly.”
Support from a4c
We acknowledge that these changes are likely to cause a great deal of confusion and therefore the whole team at a4c will be prepared to answer any invoicing questions you have in relation to these VAT changes.
Don’t hesitate to call us on 01737 652 852.
We also hope that Xero will be able to support with this new process and we look forward to the forthcoming Xero release which will contain solutions to help you.