Expert Insight: VAT Reverse Charge
From 1 March 2021, the introduction of the delayed VAT Reverse Charge will mean substantial changes in how those working in the UK construction industry process VAT.
In this Q&A with industry expert Liam Tumulty, COINS Financial Consultant, we assess the implications of the 'Domestic Reverse VAT Charge' for UK construction companies and review how COINS construction software will help to manage this change.
Why is Construction VAT Reverse Charge being introduced?
Reverse Charge is being introduced to tackle ‘missing trader’ fraud (fraud from criminals who disappeared without paying VAT due over to the HMRC) This has cost the UK government many millions of pounds. The ‘Reverse Charge’ system is designed to combat this by requiring the recipient of services, rather than the supplier, to account for VAT.
How will the Construction VAT Reverse Charge work?
From 1 March 2021, subcontractors within the UK construction industry will no longer add VAT to their invoices when they are working for other contractors within the industry. Instead they will just indicate on the invoice that the VAT needs to be dealt with by their customer under the ‘Reverse Charge’ system. Their customer (the contractor) will enter the VAT amount on their VAT Return as if they had raised the sales invoice, as well as entering it on their VAT Return in the normal way.
Why have HMRC not simply Zero-Rated Construction Services for VAT?
If HMRC had zero-rated construction services then they would have lost a significant amount of VAT. Although it may appear that the VAT cash flows for Construction Reverse VAT Charge are the same as if zero rating had been applied, this is not always the case.
How will this impact the Construction Industry?
Firstly, this is a huge administrative change for the UK Construction Industry. The industry is very diverse and comprises a very large number of small subcontractors in addition to medium and large contractors. Some contractors and subcontractors without specialist tax, accounting and IT expertise will find it hard to understand the changes. There is likely to be some confusion and misunderstanding which will result in errors on invoices, payments and VAT Returns. These, in turn, may cause disputes between contractors and subcontractors on whether the reverse charge should apply.
Secondly, there will be a cash flow impact which will adversely affect subcontractors and could cause financial difficulties. Under the current rules the subcontractor has the cash flow benefit of receiving VAT from customers which may not need to be paid over to HMRC for around three months but from 1 March 2021, the subcontractor loses this benefit. This will be a particular problem in the first few months following the change.
How should construction firms plan for the VAT Reverse Charge?
- Understanding the rules and how they apply to your business (especially end user exemption)
- Putting in place appropriate business processes for reverse charge
- Review transactions to identify which subcontractors and customers are impacted by the change
- Obtain notification from customers and notify subcontractors of the change
- Implement and test financial software changes including confirming invoices and certificates contain the correct wording
Will there be penalties for construction companies not applying the VAT Reverse Charge?
Yes, HMRC will be able to impose penalties if construction businesses do not apply the construction reverse charge rules or apply them incorrectly. However, according to the published guidance, ‘HMRC understands the difficulties businesses may have in implementing the domestic reverse charge and will apply a light touch in dealing with related errors that occur in the first 6 months after introduction, where businesses are trying to comply with the new legislation’.
How will COINS Construction Software help construction companies handle this change?
COINS finance software includes functionality to handle reverse charge transactions, which will help to reduce the risk of fines from HMRC and of disputes with HMRC and with subcontractors and customers.
- Automating the required text on invoices and certificates if there is any Reverse VAT Charge on the transaction
- Applies validation rules that will help ensure that users select the correct VAT treatment for transactions.
COINS have actively participated in the HMRC stakeholder group ever since the Construction Reverse Charge was first proposed and, through BASDA “The Voice of UK Business Software” we have worked together with other software suppliers to help ensure that the industry as a whole is informed about and prepared for the change.
Liam Tumulty, Financial Consultant, COINS
Liam has worked in Finance for over 20 years and has been with COINS since 2017. He has extensive experience in many aspects of finance including VAT, Payroll, Reporting, Shared Services and Software implementations.
COINS construction management software provides a single platform to manage all aspects of construction operations, making financial information more visible and improving reporting processes more