New VAT rules for builders in 2021

Updated: Jan 20


From 1 March 2021, new 'Reverse-Charge VAT Accounting' rules will apply to all qualifying supplies made on or after that date. This will mean that: Suppliers of goods or services will no longer be involved in the payment of VAT to HMRC. The liability for VAT payment will now be with the VAT registered customer.


The new rules apply:

  • Where construction services are supplied that fall under the Construction Industry Scheme (CIS), whether services are provided gross or with a CIS deduction

  • Both parties (the provider and receiver of the service) are VAT registered

  • VAT is chargeable at the standard or reduced rate. There will be no change for invoices where the applicable VAT rate is 0% (new build work for example)

What is changing?

Under current rules, a sub-contractor (the supplier) charges VAT to their customer, collects the VAT from the customer and accounts for it to HMRC via the VAT return.

From 1 March 2021, the supplier (sub-contractor) will not charge VAT but will amend their sales invoice to indicate that VAT is chargeable at the noted rate, but that it must be accounted for by the customer on their VAT return.

The tax point (i.e. the date the service is deemed to have taken place) is the earlier of the date of the invoice or the date of payment for the service. Any tax points on or after 1 March 2021 will fall under the new rules.

What should you look out for if you receive services from a sub-contractor

If you receive an invoice on or after 1 March 2021 from a VAT registered sub-contractor which includes VAT, you will need to notify your sub-contractor that the invoice is incorrect and should be re-issued.


You should NOT pay the VAT to the sub-contractor.

The invoice provided by the supplier should show the amount and rate of VAT that must be declared by his customer (i.e. 5% or 20% VAT)

The invoice provided by the supplier should also include some narrative along the lines of: “Reverse charge: customer to pay the VAT to HMRC.”

Invoices which include both labour and materials fall under the new reverse charge scheme. Materials only invoices do not fall under the scheme and are treated in the normal way.

What should you do if you provide services as a sub-contractor to a VAT registered business, which will then invoice another end user.

You must prepare your sales invoices differently. You will not charge VAT on your invoice.

Your sales invoice should show the amount and rate of VAT that must be declared by your customer (i.e. 5% or 20% VAT).

Your invoice should also include some narrative along the lines of: “Reverse charge: customer to pay the VAT to HMRC.”

Invoices which include both labour and materials fall under the new reverse charge scheme. Materials only invoices do not fall under the scheme and are treated in the normal way.

Penalties issued by HMRC for errors

In its guidance HMRC says that it will "apply a light touch in dealing with related errors that occur in the first six months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith".

Summary

This is a summary of the new legislation; detailed information can be found here. The existing obligations to verify sub-contractors still apply in addition to also verifying that customers are VAT registered.

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