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From 1 March 2021, businesses within the Construction Industry Scheme (CIS) must record, report and pay VAT under the new VAT domestic reverse charge rules.
This change affects both contractors and subcontractors and the supply of certain kinds of construction services in the UK.
Under the new rules, VAT registered subcontractors who provide a service and any related goods to a VAT-registered contractor who is CIS-registered no longer need to account for the VAT.
Instead, it is the contractor or developer who will account for the VAT as an input tax, as if they made the supply to themselves.
For reverse charge purposes, consumers and final customers are called end users. They are businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.
The reverse charge does not apply to supplies to end users where the end user informs a supplier or building contractor that they are an end user. This should be done in writing to maintain accurate records.
HM Revenue & Customs (HMRC) has defined a list of construction services that the new reverse charge rules apply to, which can be found here.
Where a mixed supply is made containing a reverse charge and ‘normal element’ then you should apply the reverse charge to the entire supply.
You will need to make changes to your invoicing and accounting procedures to take the reverse charge into account, but this may differ depending on whether you are a contractor or subcontractor.
You should also consider the cash flow implications on your business of moving to the new regime, as there may be ways to mitigate the impact.
The reverse charge will apply to all jobs completed on or after 1 March 2021, but it may also apply to work that was commenced before this date but completed afterwards.
Determining when the switch to the new VAT regime takes place depends on the tax point i.e. the date of issue of the VAT invoice or the receipt of payment.
Where the tax point is on or after 1 March 2021 then the reverse charge should be applied even for work commenced before this date. Otherwise, the existing VAT rules apply.
These new rules are mandatory – you cannot opt-in or opt-out, or only apply it to certain invoices – which is why you should seek help now if you believe you are likely to be affected.
Link: The VAT Reverse Charge