As of the 1st March 2021, those in the construction industry have seen a change in the way that VAT is charged. All of the information you need to know about these updates can be found below.
How Will VAT Now Be Charged?
If you are a sub-contractor, then VAT should no longer be charged on invoices to other companies in the construction industry, providing that all of the following conditions are met:
- The work done would have been subject to 20% or 5% VAT (not zero-rated)
- The work falls within the scope of the construction industry scheme (CIS)
- The customer is registered for both the CIS and VAT
In replacement for charging VAT, your building company customer should account for the VAT as both a purchase and a sale in their accounting system; this is also known as a ‘reverse charge’ entry. Customers can use this VAT treatment to account for the whole invoice value, including any extra expenses you include for materials.
To ensure that your customers are aware that they need to use the VAT reverse charge treatment, your invoice should include a notice. This can say something along the lines of ‘reverse charge [customer] to pay the VAT to HMRC.’ The note will also need to confirm either the rate or the amount of VAT due on the work.
Before you invoice customers, you will need to confirm whether they are correctly VAT registered. This can be done by using HMRC’s online VAT number checking service: www.gov.uk/check-uk-vat-number
When Can You Charge VAT As Normal?
There are now only two instances whereby VAT can be charged as normal (your customer should tell you if they fall into either of these categories); these are:
- Your customer is an ‘end user’, meaning that the work is not being charged to someone else. For example, work completed in/on your customer’s own building.
- Your customer is an ‘intermediary’ business connected with the end user by being in the same corporate group or by having an interest in the same land, such as a landlord and tenant would.
If you are still using the VAT flat rate scheme for small businesses, we will need to review whether this is still the appropriate route for your company. Our team will also be able to check the set up of your accounting software, ensuring that it can cope with the new VAT change.