The way in which VAT is applied to building and construction services is changing from 1 March 2021. This change is known as the VAT Reverse Charge for Building and Construction Services, and was initially announced by HMRC in 2017.
The change is significant as it will mean that in many cases you will no longer be paid VAT by main contractors or other sub-contractors (i.e. in circumstances in which you are a sub-sub-contractor). Instead, those main contractors will be liable to account to HMRC for the VAT due on the supplies received. This may have a significant impact on your cash flow, depending on the extent to which your supplies fall within the scope of the Reverse Charge.
As a valued supply chain partner, we want to share some of our own guidance with you to make sure we are collectively prepared ahead of the implementation date of 1 March 2021. HMRC has issued guidance ahead of the change and we encourage you to visit the official government website for updates.
Under certain circumstances as detailed below, from 1 March 2021 many of our sub-contractors and suppliers will no longer charge VAT on their supplies of building and construction services. Instead, the customer will be liable to account to HMRC for the VAT due on the supplies received.
By way of a working example – if the customer purchases VAT standard rate supplies valued at £1,000 (excluding VAT) from a sub-contractor:
- The sub-contractor will not charge VAT on their invoice/application
- The customer will pay £1,000 to the sub-contractor, i.e. we will not pay VAT to the sub-contractor
- The customer will include VAT of £200 (i.e. £1,000 x 20% VAT) as both an input and an output in its VAT returns submitted to HMRC
When considering your cash flow after 1 March 2021, you may wish to consider situations where your supplies are within the scope of the Reverse Charge as you will no longer be paid VAT by your customers who are other sub-contractors or main contractors.
When does the new Reverse Charge apply?
The new Reverse Charge will be applied where all of the following apply:
- The supplies you are making are within the scope of CIS
- The supply does not relate solely to the provision of construction workers by an employment business
- The supply is standard or reduced rated
- The supplier is VAT registered
- The customer has not provided confirmation that it is an End User (see below)
The flow chart on the HMRC website provides a useful illustration of the process outlined above.
Where a supply includes a mixture of elements that are inside and outside the scope of the reverse charge (a “mixed supply”) then the whole supply will be subject to the Reverse Charge.
HMRC has issued technical guidance clarifying that zero-rated construction services as well as any standard-rated items which are included in those services, for example the supply and incorporation of ovens and hobs on a residential new build contract, are outside the scope of the Reverse Charge.
What is an End User?
End Users are entities that receive building and construction services, but do not supply those services on along with other building and construction services.
Where supplies within the scope of CIS are made to someone who has confirmed in writing that they, or a connected party, are the End User of the building and construction services, the Reverse Charge will not apply and VAT will be charged in the normal way.
How will this affect my payments from Robert Woodhead Ltd?
In the vast majority of cases, we do not consider that Robert Woodhead Ltd is classified as End User. This means that unless we have provided you with written confirmation that we are an End User in relation to a specific contract, if your supplies are within the scope of the Reverse Charge you will not be paid VAT on your sales to Robert Woodhead Ltd.
In relation to any contracts where we do act as an End User, we will write to you to confirm that this is the case.
Suppliers operating under VAT Self Billing Agreements
Where your payments are operated under a VAT Self Billing Agreement, we will continue to issue you with the appropriate VAT documentation. This will indicate whether there is output VAT included with the payment, which you must account for on your VAT return, or alternatively the documentation will show where no VAT has been paid because we have accounted for it under the Reverse Charge.
HMRC have allowed a transitional period for self-billing arrangements, as per the table below:
|Date entered in customers accounting system||Date payment made||VAT treatment|
|Before 1 March 2021||On or before 31 May 2021||Normal VAT rules|
|Before 1 March 2021||On or after 1 June 2021||Domestic reverse charge|
|On or after 1 March 2021||On or after 1 March 2021||Domestic reverse charge|
Therefore in cases where certificates have been issued before the 1st March 2021, providing payment is on or before the 31 May 2021 the certificate and the payment will include VAT at the appropriate rate. Certificates issued before 1 March 2021 and entered on our system on or after 1 March 2021 will be treated as under the reverse charge and you will not be paid VAT on the certified value of your works if those works are within the scope of CIS.
Suppliers without VAT Self Billing Agreements in place
Where there is no VAT Self Billing Agreement in place, suppliers must issue us with a VAT invoice showing the appropriate amount of VAT and whether the Reverse Charge applies. Where we believe that an amount of VAT has been charged incorrectly and should have been subject to the Reverse Charge, we will not pay the VAT element of the invoice.
Confirmation of VAT and CIS registration status
Robert Woodhead Ltd is incorporated in the United Kingdom and is registered for VAT and CIS, with details as below:
|VAT Registration Number||185012427|
|Unique Taxpayer Reference (UTR) Number||9505000173|
The most recent guidance can be found on the HMRC website:
If you have any queries regarding the above, please forward them to our Finance Department