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Are you CIS and VAT registered? If so, read on…
From 1st October, the government is introducing the “VAT Domestic Reverse Charge” (also known simply as “Reverse Charge”) for businesses involved in building and construction services.
What is the Reverse Charge?
The Reverse Charge is a way of passing responsibility for the reporting and paying of a VAT transaction from the seller to the buyer of goods or services.
So, instead of the seller paying the VAT, the buyer takes responsibility for it.
Why is this required?
This is an anti-fraud measure. It removes the opportunity for fraudsters to charge VAT and not pay it back to the Revenue. It has been introduced in response to the VAT fraud and organised attacks on the VAT system in the construction industry, and means that the government can try to reduce the risk of companies charging VAT on their construction services and then vanishing before actually paying it over to the Government.
Yes, it does happen – and we know of some actual instances! A client paid for building work, including paying the VAT of course, and they then reclaimed that VAT as part of their normal accounting process. However, the building firm vanished into the mist without handing over the VAT to HMRC.
A huge amount of revenue is lost in this way, so the new legislation aims to make sure it’s correctly paid; HMRC expects to bring in an additional £90m in tax revenue for the first year, then £140m in the following year.
How will it work?
When a transaction is subject to Reverse Charge, the person receiving the goods or services must report on their VAT return both of the following:
If you are the customer, you will have to account for the VAT amount through your VAT return instead of paying the VAT amount to your supplier. You will also be reclaiming that VAT amount as input tax (purchase VAT), subject to the normal rules, meaning that no net VAT is payable to HMRC.
If you are the supplier of the goods or services, you will still need to issue a VAT invoice that clearly shows that the supplies are subject to the reverse charge, but you must declare the net amount of the sale only (no VAT to be declared) on your VAT return.
Who will it affect?
The Domestic Reverse Charge will apply to you if you are in a business that is CIS registered, whether you supply or receive relevant goods or services.
There’s a long list of the services that are affected, which you can see here on the government website, or we can run through with you. Here are some examples – please note that this is not the complete list…
As is often the case, there are some exceptions.
A company called “The supplier” provides construction services to a company called “The customer” for the net amount of £1,000.00 plus VAT.
What will happen after 1st October:
When preparing the VAT return:
Confused? Don’t worry – that’s why we’re here!
Cash flow impact
The reverse charge will have biggest impact on small and micro businesses, particularly in respect of loss of cash flow where subcontractors will no longer receive the VAT, as some businesses use the VAT they collect from customers as working capital before they pay it over to HMRC.
HMRC understands the difficulties businesses may have in implementing the domestic reverse charge and will “apply a light touch” in dealing with genuine mistakes that occur in the first six months after introduction, where businesses are trying to comply with the new legislation.
You can read much more about the reverse charge on the government’s website, but it’s long-winded. If you have any questions, it’s better to simply get in touch with our VAT team and we’ll be happy to talk you through the process.
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