UHY Ross Brooke Chartered Accountants

Important new VAT rules for businesses in the Construction Industry

reverse charge VAT for builders in Newbury, Hungerford, swindon and Abingdon

As a consequence of the increasing amount of missing trader VAT fraud in the construction industry forthcoming changes will alter the way that vat is calculated and paid by affected businesses.

From 1 March 2021 supplies of both labour and materials made by sub-contractors to contractors will be made under the reverse charge mechanism. Supplies made to the end customer of the building project will not be subject to these new rules and VAT will be calculated in the usual manner. The subcontractor will be responsible for establishing whether its customer is the end customer or simply a link in the supply chain.

For example if a subcontractor invoices it’s contractor customer £100,000 of standard rated supplies it will no longer add VAT to its invoice. Instead it will include a statement that the supply is subject to the reverse charge mechanism and the contractor will need to include output VAT to its VAT return and subject to the usual recovery rules, recover the £20,000 as input VAT.

The reverse charge will only apply to standard rated and reduced rated supplies ie zero rated supplies will not fall within the reverse charge procedure.

Unlike the existing reverse charge rules for overseas supplies, supplies within the construction industry reverse charge mechanism will not count towards the VAT registration limit which will help small businesses remain below the compulsory VAT registration threshold.

Small VAT registered traders in the construction industry and within the VAT flat rate scheme will need to review whether they should remain within the scheme as there will be no gains to be made from the percentage difference on supplies and also no recoverability of input VAT. A potential double whammy.

Calculating and applying the correct rate of VAT is already complex enough and combined with the special CIS income tax rules, these new rules create another level of complexity. It’s more important than ever that anyone working within the construction industry has the support of a good accountant.

If you would like any advice on the VAT reverse charge mechanism as they apply to the construction industry please contact me on c.davies@UHY-rossbrooke.com on 01635 555666 or your usual point of contact within the firm.

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