VAT reverse charge for the construction industry

15 February 2021
Photo by Greyson Joralemon on Unsplash

From 1 March 2021, the VAT rules for work carried out in the construction industry are changing. 

If a contractor and subcontractor are both VAT and CIS registered, it’s likely that these new rules will apply.

If they do:

  • as a subcontractor, you’ll raise your invoice without VAT. The contractor will no longer pay you the VAT and so you won’t have to pay this to HMRC, but you will still be able to reclaim VAT paid on expenses (unless you’re on the VAT Flat Rate Scheme, see more below)
  • as a contractor, you won’t pay the subcontractor the VAT that would usually be on their invoice. Instead you will need to report the VAT on your Return as both payable and repayable, effectively paying it to HMRC on the subcontractor’s behalf.

We’ve produced a visual summary to help you understand what you need to do either as a subcontractor or contractor, please click on the image below:

VAT reverse charge flow chart

If you’re a subcontractor on the VAT Flat Rate Scheme you will need to decide whether you wish to remain on the scheme or switch over to standard VAT accounting. As you’ll no longer be receiving the 20% VAT on your sales, you also won’t pay your applicable flat rate % to HMRC. You’ll therefore miss out on keeping the difference, which is the VAT that you’re deemed to have incurred on your expenses.

For some, the simplicity of the VAT Flat Rate Scheme may still outweigh the additional administration and/or costs involved in reclaiming that VAT on the standard scheme. For others, who may incur more significant VAT on expenses, it could well be worth considering the switch.

If you would like more detailed advice on this and how it affects you, please do get in touch with us.

Phone us on 01892 891902 or contact us to talk about your financial plans