Construction and building firms, including labour only sub-contractors, must be prepared for a major change to the way VAT is accounted for in their sector despite their current attention being focused on pandemic recovery, according to a national expert.
Ellen Main-Jeffrey, Head of VAT Services at accountancy firm Burgis & Bullock, has warned businesses that they have less than a month to review relationships with customers and suppliers ahead of the much delayed introduction of the Domestic VAT Reverse Charge.
The new Reverse Charge, which was put off twice due to Brexit and Covid-19, comes into effect from March 1 and will make customers responsible for accounting for VAT on building service rather than the supplier.
It marks a major change in how cash flow is managed in the supply chain and is designed as an anti-fraud measure to counter building and construction service providers absconding with VAT collected from customers.
The Reverse Charge will only apply to supplies of building and construction services which are liable for VAT at 5 per cent or 20 per cent, and where the payments currently go through the Construction Industry Scheme (CIS) and where both supplier and customer are VAT registered. It will not apply to end users or intermediaries.
Ellen, who has specialised in VAT for 35 years, says time is running out for businesses to understand how this new regime affects them and is advising them to start the review process immediately if they haven’t already.
She said: “In the first instance suppliers will need to check that their customer’s VAT number is valid and that they are registered for CIS, as well as checking contracts to see if the Reverse Charge applies and making any necessary changes to their accounting records and invoices.
“It will impact on cash flow and businesses selling these services may find themselves in a regular VAT repayment position.
“Customers will have to be aware of the change too, in order to tell suppliers whether they are exempt from the charge or not. They will also have to find out how to account for the Reverse Charge on their own return.
“The detail of the rules is complex and that’s why it is crucial businesses start to review their relationships immediately. Some of our clients have been surprised by the extent of the practical changes they have needed to consider.
“For example if the contract is for supply and fix, then the Reverse Charge applies to the full value even if labour and materials are invoiced separately.
“Contracts might be for a mix of services, and some of these could be within the scope of the Reverse Charge and some outside of it.
“Suffice to say knowing when to apply the Reverse Charge will be difficult so it will be important to be prepared and understand what this means for your business before March 1. I’m sure many could do without this added disruption as they look to rebuild from the impact of the pandemic.”
Burgis & Bullock has offices in Leamington, Nuneaton, Rugby and Stratford-upon-Avon.