*DOMESTIC REVERSE CHARGE VAT FOR CONSTRUCTION INDUSTRY – POSTPONED*
On Friday, 6th September at around 5:00pm, HMRC announced that they were postponing the implementation of the Domestic Reverse Charge.
Should you have an queries regarding this please contact us on (01509) 816150
VAT for CIS registered businesses is changing from 1 October. The new system is called Domestic Reverse Charge for VAT. It applies to sole traders, partnerships and companies. We pointed this out in an article in June. Because the deadline is looming and it seems that many businesses just aren’t aware, we feel we should repeat the information.
VAT registered subcontractors and contractors will both be affected.
At the moment a subcontractor issues an invoice and adds VAT to the invoice. The payment received will be the invoiced amount, including VAT, less any CIS (Construction Industry Scheme) deduction – usually 20%.
Subcontractors therefore have the VAT in their bank until they pay their VAT bill. This could be anything up to four months but will probably average around two months. This is a help with cashflow and may reduce or eliminate any overdraft interest.
Under the new rules, applying from October, the subcontractor will not charge VAT as part of their main invoice to a VAT Registered contractor. The subcontractor will still need to show their VAT registration number. Their invoice will need to include an additional section saying something like, “This invoice is subject to CIS Domestic Reverse Charge. The VAT applicable is £x.”
Under CIS, supplies of materials are treated separately and no deduction is made. For Domestic Reverse Charge for VAT, materials are treated the same for VAT and you, as a subcontractor, will not receive the VAT on materials – but there will be no CIS deduction on materials.
As a subcontractor you will not receive the VAT element. Your VAT Return will still show your total sales (excluding VAT) but the sales VAT will be zero.
If you are a VAT registered subcontractor, the new rules could mean that you are generally in a net reclaim situation which may make it attractive to switch to monthly VAT. A lot will depend on how much of your invoicing relates to materials. Ask us to analyse this for you.
As a contractor, you will receive invoices from your subcontractors where the supply is subject to VAT – but no VAT is charged. You need to account for both sales and purchase VAT on your VAT Return. One will cancel the other giving a zero result. Nonetheless, you need to include both figures on your return so that HMRC can follow the transaction trail should they want to do so.
You will deduct CIS for labour, but not materials, in the normal way and pay your subcontractor the net amount – but you must not pay the VAT.
As a subcontractor, you need to ensure that your invoice layout is correct and complies with the new rules.
You should check that the contractor you are working for is VAT registered. If the contractor isn’t VAT registered, you will need to invoice in the traditional way.
As a contractor, you need to ensure that whatever system you use to produce your VAT Returns can cope with the new requirements. Most cloud based systems, such as Quickbooks, Xero, Sage Business Cloud, FreeAgent etc, will be able to deal with the different rules. However, some older, legacy, systems will not, obviously, deal with the changes and spreadsheets will not. Don’t panic too much; there are almost certainly workrounds to help you get the right result. Ask us, but don’t leave it until the last minute.
We recommend that you start preparing now. Contact us for a free, no obligation, chat about your circumstance and requirements. You can ring us on (01509) 816150 or complete our form.