CIS Reverse VAT Charge
Following 2 delays, the long due reverse VAT charge scheme will formally come into practice on 1st March 2021, well after its originally intended implementation date of 1 October 2019 due to Brexit and subsequently Coronavirus. The scheme intends to mitigate VAT fraud executed by traders in the construction industry who charge VAT to their clients but do not disclose the same to HMRC. The scheme will only be applicable to those business who are CIS registered, and in turn, VAT registered in the UK.
The new rules will require subcontractors and contractors to alter their invoicing formats since VAT on their services can no longer be charged to their client. Instead, the invoice amount must be net of VAT and clearly state the rate of VAT which would have been applicable as well as the fact that the invoice is compliant with the new CIS reverse charge applies to the invoice. The reverse charge must also only be applied if the recipient of the services intends to continue supply of construction based on the services they received from the contractor or subcontractor. The two parties involved in the transaction must also be independent of one another hence two companies held under a group may not be deemed as separate parties.
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How it works?
Under the reverse VAT scheme, the recipient of the service accounts for the VAT charged by the supplier [i.e., the supplier’s output VAT]. Given that the supplier does not actually receive the VAT since this is deducted from the invoice amount, the cash flow implications of the same must also be carefully considered by contractors and subcontractors. Earlier they would have received the VAT amount which could have been spent on materials and the input VAT incurred on these would have offset to an extent the VAT payable to HMRC at the end of every quarter. Following 1st March, the recipient of the services benefits since they retain the amount of VAT they would have had to pay, thereby strengthening their liquidity. Albeit recipients of the services should remember that they must still account for the account for the VAT they would’ve paid at the end of the quarter and, under normal circumstances, will have their input VAT offset by a greater amount of output VAT if they are trading profitably.
To better understand how the reverse VAT charge will apply to your business and avoid incurring unnecessary fines through incorrect invoicing or non-compliance with the imminent changes in accounting for CIS and reverse VAT, contact us ASAP. You can either Call now to book a meeting or fill out our quick and simple form using the ‘Contact Us’ tab at the top of the website page. Check out all the other services we can offer to strengthen your business’ cash flow position and profitability.
