In 2019 at the final hour the government postponed rule changes that would affect the way the construction industry reports, charges and pays VAT. In the Budget in March 2020, although not in the Chancellors announcement, the Budget Report confirmed that this is due to come into force on 1 October 2020.

This means that on top of other current cash flow concerns the construction industry should focus heavily on cashflow this summer.  Plans to cope with the change in how VAT is collected should be considered now so you are not caught out.

 Domestic Reverse Charge is a major change affecting how VAT is collected in the building and construction industry. There is more information on the Gov.UK website here.

Domestic Reverse Charge VAT: The key points

Why is the change happening?

The new regulations are intended to counter “missing trader fraud” – where a trader reclaims input VAT that the supplier has no intention of ever paying over to HMRC. HMRC estimates that over £100m a year is lost by this and similar types of frauds. Their solution is to change the way VAT is collected so that there is nothing to defraud.

How the Domestic Reverse Charge works

From 1st October 2020, the reverse charge means the customer receiving the service will have to declare the VAT due to HMRC instead of paying it to the supplier. They can simultaneously recover the VAT in the usual way by showing it on the same VAT return as paid on purchases.

This is effectively like a CIS style system for VAT payments on construction services.

Who does this apply to?

Broadly, Domestic Reverse Charge applies when:

  1. Both the supplier and customer are VAT registered
  2. Both the supplier and customer are Construction Industry Scheme (CIS) registered
  3. The supply includes construction services
  4. The services supplied are subject to VAT at either the 20% standard rate or 5% reduced rate
  5. The customer is not the end user

Knowing whether the customer is an end user is an area of concern. HMRC guidance states that if there is any doubt, the supplier should ask the customer is they are the end user and keep a record of their response.

More admin!

If you are the customer in the above relationship, then there will undoubtedly be more admin for you to deal with. The main software companies (Sage, Xero and Quickbooks) are all working on changes to accommodate this. 

There will still be changes required to your usual quarterly processes and internal record-keeping though and it is not clear yet what the penalties would be for those who get this wrong.

We would also recommend that you contact your regular suppliers to let them know that this is happening.

Cash flow problems?

This will undoubtedly cause cash flow problems for many construction businesses who do most of their work for other construction businesses.

Any company which suddenly loses 1/6th of the money it usually receives from its customers would need to make some serious adjustments and this change is no different.

But this is only a timing difference. Because they no longer pay the VAT on some of their sales to HMRC, they become what is known as “repayment traders” i.e. their VAT Return is a net claim from HMRC instead of a net payment.

Moving to monthly VAT returns

If you are repayment trader, then to alleviate cash flow problems you can apply to move to monthly returns to speed up payments due from HMRC.

The best time to move to monthly returns may well be at the end of the September 2021 quarter.

The last straw?

For many small construction businesses, this extra piece of legislation and admin may represent the last straw when all they want to do is get on with earning a living.

If that’s how you feel, A4G Bookkeeping provide comprehensive services to take care of all of this for you from basic bookkeeping, Construction Industry returns, VAT and management accounts. Rates are competitive and more importantly you have peace of mind that all the admin and red tape is being taken care of, enabling you to earn more or simply have a bit more time for yourself.

Book your free consultation

How can we help you?

If you’re affected by the new regulations, you need to start preparing now ready for its implementation on October 1st.

A Domestic Reverse Charge telephone consultation with a qualified adviser at A4G costs only £145 + VAT and bespoke report calculating how this affects your cashflow and the steps you need to take. 

To arrange a consultation with one of our experts, complete the form below and we’ll call you back.

How to comply with Domestic Reverse Charge | Webinar

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Call us on (01474) 853856 and we will put you in contact with one of our advisers, or send us an enquiry by clicking below.

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