Reverse Charge VAT Reminder

By Liz Bridge of the Joint Taxation Committee.

Have you been hoping that reverse charge VAT will just go away? Have you thought that no Chancellor in his right mind would test the cashflow of the construction industry to the limits in the middle of a pandemic?

Think again. Reverse charge is a big ship and it takes a lot of money and effort to move it; that money and effort has now been spent and there is no going back, it is too late to stop the change. The software has been commissioned and installed and the people trained to use it. The answer must be that you must get going immediately.

At this point I think you should look very carefully at the contracts and contract partners that you expect to pay you in March and April, and the firms that you expect to have to pay in those months.

This whole scheme turns on knowing your customer’s VAT number, and Construction Industry Scheme (CIS) Unique Tax Reference (UTR). The work a scaffolding firm does is squarely within the scope of CIS so that fact is a given.

Once you know your customer’s VAT and CIS UTR, you must ask them whether they are an end user on the project. If they fail to answer you will reverse charge, if they say they are not an end user you will reverse charge.

Only if they respond positively that they are an end user will you charge VAT as you do now. Most main contractors are not end users speculatively building for themselves, most work for clients – so you will reverse charge the invoices to them.

Now ask yourself – of the customers who should pay me in March, which of them have already supplied their VAT and CIS details and where am I storing them?

Do I have a specimen reverse charge invoice and a reverse charge application for payment that I can use after 1 March?

Following on from this thought, do you have subcontractors who supply construction services to you? You should warn them that after 1 March you will not be paying VAT and that they should reverse charge you.

Give them your VAT number and CIS UTR now and tell them that that on the projects they do for you, you are not the end user. That will allow them to set up their systems correctly.

You must also think about what your business cashflow will look like. Now for every £100 of work done you put £120 into the bank and can use that £20 VAT for some weeks until it is payable to HMRC. In the time you hold, you can use it to pay the VAT on any Vatable purchases you make. After 1 March you will receive VAT from householders and private customers, but probably none from the main contractors.

You will still be buying poles and clips and boards and lorries. You will be paying out VAT daily with no incoming VAT to set against the expense. You must think about becoming a VAT repayment trader and putting your VAT returns in monthly or else you will find yourself banking with HMRC and only getting your money back quarterly.

Do your accounts staff know what they will be doing? Do they know how to use the new software? Have you got new software because you will need updates that can cope with reverse charge?

Use these last few weeks to get ready. This is not a slow change that will take a few weeks and you can pick up as you go along. This is a change where the world of VAT alters entirely from one day to the next.

HMRC has a good webinar here. Watch it, watch the training video in the Members’ Area here and then watch both again – it will begin to make sense.