VAT & the domestic reverse charge for the construction sector
This is an article recently prepared by our partners at Xeinadin Group
“Building Back Better” is a phrase often heard in the current environment but to take its literal sense in a constructor sector context, the pressure across the UK remains for the ability of this sector to achieve a full recovery to pre Covid activity levels.
Commentary in the trade press in the autumn reflected what we, on the ground here at Centurion VAT, were seeing with our own clients as well as clients across our Xeinadin Group accountancy firm partners.
Larger projects across sectors such as Universities and Colleges were being put on hold but activities across housing, particularly in the social housing sector, maintained a more certain degree of traction. Overall, the view remained that 2020 would bring the largest one-year fall in output on record for the sector.
Therefore, as our accountancy partners such as the Hugh Davies & Co team, were supporting their construction sector clients with the day-to-day focus on financial support measures from government and how to access those we, at Centurion VAT, recognised the VAT pressure for the subcontractor market that the autumn brought, and having worked with clients to implement changes, we offer our specialist thoughts on the implementation of the Domestic Reverse Charge for VAT on Construction services (DRC).
What is the DRC for Construction Services?
It is a mechanism that is used by the tax authorities to remove the risk of VAT being charged by suppliers but not finding its way to the tax authorities – VAT charged but not declared, you might say.
How does the DRC for Construction Services work?
It works by the supplier no longer having to charge the 20% or 5% VAT that is due on the construction work undertaken and moving that responsibility to pay over the VAT due to the customer.
The customer charges itself the VAT that the supplier would have in the past charged and the customer then looks to recover that VAT cost in the same way as it would have under the normal VAT rules.
For many customers, the financial impact from this VAT change is nil therefore – as what they charge themselves and pay over to HM Revenue & Customs on their VAT return, they can recover on the same return.
Arguably for the customer it creates a cash flow advantage for them as they do not have to “pay” the VAT amount to their supplier weeks in advance of being able to recover that VAT cost on their VAT return.
However, the negative financial impact for the supplying construction firm could be dramatic. A lot will depend on the mix of clients your building firm has and the mix of works that you engage on.
But it is clear that the greatest impact from the VAT change is on the subcontractor sector as main contractors should largely see their VAT processes unaffected by the DRC.
When does the DRC apply from?
The good news that did arise for the building sector in the autumn was that this DRC was once again, to be deferred. Not removed but pushed back to implementation from the 1 March 2021.
At Centurion, and across our accountancy partners such as Hugh Davies & Co, we are all working hard to ensure our clients understand the potential negative impact of this VAT change and to what extent they need to change their accountancy processes and readjust their cashflow forecasting as a result.
Put simply, from the 1st March 2021 many subcontractors have found they are not allowed to charge VAT on invoices to their main contractors. A bill for £20,000 plus VAT of £4,000 becomes a bill of £20,000 only. You lose that £4,000 of monies for the time that you could use that in the business before passing over to HMRC on your VAT Return at the quarter end.
Equally you will find your subcontractors not charging you VAT but your VAT accounting systems having to pick up and declare “their” VAT on your returns which you then recover.
A change of this complexity just illustrates why it is so important to keep up to speed with these issues in your business.
You can find “free to access” information on the DRC for the construction sector on the HMRC.gov.uk website.
There is a wide range of specialist services you can access in the Xeinadin Group to help you and your business not just survive but thrive in the future.
Whatever your business - help is only a call away.
Use this flowchart to see how you would decide whether to apply normal VAT rules, or apply the domestic reverse charge.
This flowchart is to help businesses receiving building and construction services check whether normal VAT rules or the domestic reverse charge.
Liz Maher: Director Centurion VAT Specialists a member firm of the Xeinadin Group. Centurion specialises in VAT when it becomes complicated and expert advice and support is required.
This article is for information only and does not constitute advice or financial guidance.
© Centurion VAT January 2021