St David may soon become the patron saint of builders as 1 March sees some changes in the way VAT is accounted for on construction work.
VAT registered traders who are supplying construction services to another VAT registered trader and the customer is a registered contractor within the Construction Industry Scheme.
Are all transactions covered?
No, it must be a supply of Construction Industry services which would be vatable at the 5% or 20% rate, AND your customer must be making an onward supply to someone else. So this will cover most instances of subcontractors supplying services to a main contractor, but not someone, for example fitting a new heating system in your business premises.
Employment agencies supplying staff are outside of the reverse charge rules.
So what does it mean?
In practical terms it means you will account for your input and output VAT on the same return, without actually charging your customer any VAT. This means you will lose the cashflow advantage of the VAT being paid to you in advance of your VAT payment due date.
Your sales invoice will include all the same information as previously;
- it will also need the customer’s VAT number.
- The amount of VAT to be paid by the customer
- It must also state clearly that the reverse charge applies “Reverse charge – customer to pay VAT to HMRC” for example.
If a single invoice is raised for work covered by the reverse charge and work not covered then the whole of the invoice amount should be subject the reverse charge unless the value of the reverse charge work is less than 5% of the total, in which case VAT is charged on the whole of the invoice under normal rules.
What do I need to do?
If you are a supplier to a main contractor HMRC suggest that your terms and conditions state you will assume your customers are end users or intermediary suppliers UNLESS they tell you they aren’t. Under this term you would charge VAT at the appropriate rate.
It is your customers’ responsibility to confirm they are making on onward supply to an unconnected party (intermediary), then you will not charge VAT on your invoice but will use the reverse charge mechanism.
You will also require their VAT number.
If VAT is charged incorrectly your customer will have to ask you for a VAT credit to correct the position, it is not possible to recover the VAT from HMRC.
What about materials?
HMRC have confirmed that a single job is the supply of labour and any relevant materials and should be covered on a single invoice.