VAT Reverse Charge

VAT Reverse Charge

On the 1st of March 2021, the VAT reverse charge was introduced. Does it affect you?

What is it?

The VAT reverse charge means you will charge yourself VAT and then claim it back as input tax, which is subject to the normal rules. So, in theory, you are acting as both the supplier and customer.

Who does it effect?

The charge is to be applied to:

  • Standard AND reduced-rate VAT services.
  • Any individual or business registered for VAT in the UK,
  • VAT reported within the Construction Industry scheme,
  • Required for most supplies of building and construction services.

Why has it been introduced?

It has been introduced as a way of combatting VAT fraud. It has been estimated that more than £100 million is lost each year through this fraud. In 2019,  £34 million was stolen by one gang alone.

When must it be used?

The charge must be used for, but not restricted to, the following services:

  • Constructing, altering, or dismantling buildings, railways, pipelines, drainage, and other structures.
  • Installing heating, lighting, ventilation, and power to a building
  • Internal cleaning carried out during construction.
  • Painting and decorating both internal and external surfaces.
  • Services forming an integral part of the preparation or completion of the above.

For a full list, including those services that the charge does not apply to, see here. See the following flow chart from HMRC to help you decide if normal or reverse rules apply.

What do I need to do now?

Make sure that your accounting software is capable of recording the reverse charge, if not you may need to swap to a different system. Then, you need to ensure that your invoices show the charge, sub-contractors see below.

You can switch to monthly returns as you may need to now make net repayment claims to HMRC. You can do this through you online VAT account.

Sub-Contractors

There are two possible showstoppers for your business if you are a sub-contractor.

When the reverse charge applies sub-contractors do not charge VAT but do need to get their invoice in the correct form. Failure to do so could have a catastrophic impact on their cash flow. If you have customers who find every reason to delay payment, then you must ensure that you do not give them another reason. We strongly recommend that you get them to agree the format of the invoice when you send it. Do not wait until the expected payment falls due to check the invoice as you’ll probably told to send another invoice, delaying payment by another month.

Many businesses rely on the vat monies to help provide cash flow. When your customers pay, they give you 20% of the sale to keep for up to 3 months. You will not receive the cash flow benefit if your invoices no longer have VAT applied. Also, if you no longer have any VAT on your sales you should look at changing to monthly returns in order to recover the vat on your purchases quicker.

Flow Chart

 

Why not get in touch with the accountants at Big Hand? We focus on giving professional business advice and managing your accounting needs with our expertise you don’t have to worry. All you need to do is call us on 0161 327 2911.

About the Author:

Since 2013, Sophie has been an integral part of the Big Hand team. As a social butterfly, Sophie is mostly responsible for introducing new clients to the company. If you’re an avid networking, you’re most likely to meet Sophie at local events. Alongside attracting new business, she also assists with account management, and she manages payroll on behalf of clients. For fun, Sophie loves to keep fit running or playing korfball with her team. She is also in the middle of learning a new language and so her most recent challenge is attempting to read Harry Potter in Dutch.