What is the VAT reverse charge for construction industry?

After a couple of delays the VAT reverse charge for the construction industry finally came into force on 1st March 2021. It’s a big change in the way contractors have to account for VAT on some of their transactions and it certainly doesn’t simplify the process. We have answered some of the main questions you may have about the changes to try to simplify things for you.

1: Why are the changes being introduced?

The short answer is to try to reduce VAT fraud. HMRC believe they lose out on a large amount of revenue from subcontracting firms collecting VAT on invoices to contractors then disappearing before passing the money over to HMRC. The reverse charge is expected to reduce the opportunity for this to happen.

2: What were the rules that were in place?

Currently the rules are the same as almost every other industry, if a subcontractor carries out £1,000 worth of work they charge the contractor £1,000 plus £200 VAT, they then receive £1,200 from the contractor and pass the £200 over to HMRC at the end to the quarter when they fill in their VAT return.

3: What’s changed under the new rules?

Under the new reverse charge scheme the subcontractor carrying out the same £1,000 of work will invoice the contractor £1,000 but instead of adding £200 VAT to the invoice they have to state the VAT reverse charge applies to the transaction. The contractor paying the invoice then pays the subcontractor the £1,000 due and includes the £200 VAT in their own VAT return as both an input and output VAT transaction.

4: Does this apply to all sales by a subcontractor?

No. For the majority of sales by most subcontractors the normal VAT rules will apply, the new rules only apply in certain circumstances. To decide when to apply the new rules we have a list of questions to ask yourself about the transaction, if you follow the flow chart and don’t make it all the way to the bottom you simply apply the standard VAT rules.

5: Do I have to change my invoices?

Yes you do, however if you use an accounting package like QuickBooks to generate you invoices then the software will make the necessary changes so you charge the right amount to your customers.

If you have any questions about these changes or anything else you can contact us any time, we are always happy to help try to reduce the confusion that changes can sometimes cause.