The domestic VAT reverse charge came into effect from 1st March 2021, this may apply to businesses who work in the construction industry and are VAT registered. The legislation was brought in to protect against VAT fraud through customers paying VAT direct to HMRC instead of to the supplier.
This applies to businesses supplying building and construction services. The supply of staff is not subject to the VAT reverse charge.
Employment businesses supplying construction workers
Employment businesses supplying construction workers are, for VAT purposes, treated as supplying staff rather than supplying building and construction services and therefore are exempt from applying the VAT reverse charge. VAT should be charged on invoices as normal and is payable by your client to your business.
Similarly, if you engage a VAT registered sub-contractor and they are paid on an hourly or daily basis and a timesheet is used to record the time worked, they are also classified as an employment business. This means the wages your business pays to their business are exempt from the VAT reverse charge.
Labour only sub-contractors
Labour only sub-contractors are subject to reverse charge rules. A labour only sub-contractor is responsible for the construction works carried out and not just supplying labour.
The simplest way to identify the two is:
· Supply of staff - The customer that receives the staff will be responsible for overseeing the completion of the project.
· Labour only sub-contractor - the business supplying the labour will be responsible for the overall completion of the project by the workers.
Permanent placement
Permanent placements of construction workers do not fall within the scope of CIS and therefore the VAT reverse charge does not apply.
How does the VAT reverse charge work?
The VAT that would normally be paid to your business will instead be paid directly to HMRC by your client. This will be reflected on the VAT return.
This may have some effects on how your business works:
· Cash flow - Due to the VAT being paid directly to HMRC this does mean it may have a negative effect on the cash flow into your business as you will be paid less than normal for invoices sent. This means you need to be aware of this and plan accordingly.
· Invoices - If you fall under the scheme, invoices must clearly state if the scheme applies and how much VAT is due to HMRC based on the invoice amount. All normal VAT information will also need to be included. We will then include the sales in your VAT return but not the VAT due to HMRC as they will have already received this.
· VAT refunds - If you regularly fall under this scheme it may well mean that your future returns will result in a refund on a regular basis from HMRC due to claiming VAT back on expenses. This is worth noting when planning the company’s cash flows in the future.
HMRC are launching with a soft touch meaning they understand mistakes may happen in the first 6 months and will therefore not be penalising people if they need to make corrections. If you are worried that you have made a mistake or are unsure whether this applies to your invoices, please contact us.