VAT Reverse Charge for the Construction Industry in 2021
The long-awaited reverse charge for the construction industry will finally be introduced in 2021. While delays in bringing in this change meant that there have been doubts about whether it would ever arrive, it now appears that HMRC is preparing the way for launch.
The Latest Developments
HMRC is now sending out letters to businesses that will be affected by the VAT reverse charge. These letters confirm that the change will come into force on March 1, 2021 and also encourage the recipient to join a webinar on the subject.
These webinars are available on a variety of different dates, and businesses can check for the most suitable to meet their needs. They also point out in the communication that attendees will be able to use an on-screen text box to ask questions.
When Is the Reverse Charge Used?
The VAT reverse charge will apply to most supplies that are used in the UK building and construction sector. It will be used on standard and reduced rate VAT services for any person or company that is registered in the UK for VAT.
All businesses need to prepare for this move by ensuring that their accounting software is ready to deal with the reverse charge. They also consider how this change will affect their cash flow situation.
Building companies will use this reverse charge on all supplies needed for a job, such as new ladders, a fall protection post, amongst other safety equipment. Any company that this doesn´t apply to should continue with the usual VAT rules.
There is a long list is construction jobs in which this charge is to be used from next year onwards. When reviewing the official government guidance on the matter, you will also see that a number of exclusions are listed.
More About the Upcoming Changes
Essentially, in the correct situations, the customer will be responsible for the VAT on their VAT return, for all supplies that are used for their construction and building works. The building company is currently responsible for this under the law.
One of the biggest changes is that businesses in the construction sector will no longer hold onto sums that are due to HMRC. This could adversely affect their cash flow from now on.
Perhaps more importantly, the government thinks that this change will help to reduce VAT fraud. In fact, some estimates suggest that it could help the country to reduce VAT fraud by close to £100 million.
There have been suggestions of a VAT reverse charge since at least 2017, but its introduction has been delayed more than once in the past because of Brexit and because not all businesses were ready to handle it.
What Comes Next?
All businesses in the construction sector should look out for their invitation to a webinar on this subject. As well as this, it is worth checking out the latest government news and guidance on it. There are still a few months to go, but it is a good idea to prepare in plenty of time to ensure a smooth change.