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After an initial delay, the VAT reverse charge finally came into effect on 1 March 2021. The HMRC indicated that they would show leniency when dealing with any erroneous VAT returns made within the first six months of the new legislation coming into force (until 1 September 2021). However, this leniency has always been subject to businesses acting in good faith and attempting compliance, and is soon to be replaced with a more strict approach. As September 2021 gets ever-nearer, it is vital that businesses understand how the VAT reverse charge applies to them and make the necessary preparations to ensure that they are compliant with the new scheme.
The VAT reverse charge is a mechanism which, in a nutshell, shifts the burden of accounting to HMRC for VAT from the supplier of construction services to the recipient of that supply. It is designed to put a stop to suppliers charging their customers VAT and subsequently failing to account for that VAT to HMRC.
The new mechanism applies to VAT registered businesses supplying building and construction industry services to other VAT registered businesses in the supply chain. There are some exceptions where the reverse charge does not apply, such as where the recipient of the supplies is the “end user” (i.e. the final consumer) or an “intermediary supplier” (for example, a landlord and tenant).
This is a big change to the construction industry affecting how businesses account for VAT to HMRC and manage their cashflows. While many businesses will have already made the necessary preparations, there may be some that are not quite there yet.
The reverse charge mechanism affects invoicing regimes that have been in place for as long as most of us can remember. Now, where a supply is subject to the VAT reverse charge, the supplier must ensure that their invoices clearly state the amount of VAT due (but not charged), and expressly state that the VAT reverse charge applies. Businesses should ensure that their invoices are updated to reflect these requirements as soon as possible, and in any event before September 2021.
As suppliers will no longer be receiving payment of the VAT directly from the recipient, this of course means that the gross value of payments received will be reduced. Suppliers should therefore consider the impact that these reduced payments will have on their cash-flow. Suppliers will now have to make net-repayment claims to HMRC to recover their VAT and could therefore without that payment for some time. In order to try and alleviate these cash-flow difficulties, businesses may wish to adopt a monthly VAT return cycle.
Both suppliers and recipients should consider making amendments to existing contracts, and drafting new contracts to include express provisions relating to the VAT reverse charge. Customers, where the reverse does apply, will want to ensure that their suppliers provide them with all information necessary for them to be able to account for the VAT and may wish to include specific requirements in the contract as to the content of the supplier’s invoices. . These provisions may even provide that VAT may be withheld or deducted by the recipient where the supplier fails to comply with those invoicing requirements.
Is the customer the “end user” or an “intermediary supplier”? Suppliers may want include a warranty from the recipient to confirm that the customer is an “end user” or “intermediary supplier”, and as such the VAT reverse charge does not apply. Customers may, however, prefer the reverse charge to apply, for cashflow reasons. Either way suppliers and customers alike will want to ensure that the position is clear from the outset.
The VAT reverse charge scheme is clearly here to stay. Undoubtedly the HMRC are going to take a more rigid approach to dealing with VAT returns and will be penalising those who are non-compliant. If you haven’t done so already, now is the time to ensure that your business has made the necessary preparations for compliance with the VAT reverse charge.
If you require further information about the VAT reverse charge, the impact it may have on your business, and the measures which are at your disposal, please do not hesitate to contact us.