Calls for VAT Reverse Charge Start on 1 March 2021 to be Postponed Again

HMRC Building entrance

AN EARLY DAY MOTION has today been lodged in Parliament calling for the VAT Reverse Charge to be postponed.

The VAT domestic reverse charge for construction comes into force on 1 March 2021.

It was initially planned to start in October 2019 but was postponed to October 2020 to allow more time for businesses to prepare.

HMRC extended the October 2020 deadline again because of the pandemic and Brexit.

The Early Day Motion was lodged in Parliament by five Scottish National Party MPs and a Democratic Unionist.

The motion calls for another postponement of the Reverse Charge. It says that SMEs are “still reeling from the impact of a prolonged pandemic and the disruption of leaving the EU.” Both reasons were given as causes of the last postponement by the Government.

The motion points to the “devastating impact on cashflow” that it says the reverse charge will have, saying that companies will need to increase their sales by 3-5% to offset the effect.

The Reverse Charge VAT scheme

The VAT domestic reverse charge for building and construction services changes the way VAT is accounted for. It applies to construction services and the materials used when carrying out those services in the UK.

It does not apply to materials supplied separately and independently of any construction services.

The VAT reverse charge for construction applies only to transactions that are reported under the CIS and are between VAT registered contractors and subcontractors.

It means that those supplying construction services to a VAT registered customer will not have to account for the VAT. Instead, the customer will account for the VAT. It will be considered as input tax for them, as if they’ve made the supply to themselves.

Roofing sector

In the roofing sector, it will usually mean subcontractors will require the contractor employing them to handle and pay the VAT due on their services. They will pay directly to HMRC.

The payment received will be for the cost of the work done (plus materials used), less any CIS deductions for tax and National Insurance – but no VAT will be paid on the invoice.

The reverse charge will apply to VAT invoices issued, or the receipt of payments, on or after 1 March, 2021.

If a prepayment was made then it will be the date that the supplier received payment. When there is no invoice or the invoice was issued 15 or more days before the work is finished, then VAT will be due on the date that the work was finished.

In cases where the tax point is on or after 1 March 2021 then the reverse charge should be applied. If the tax point is before that date, current VAT rules apply.

Combat VAT fraud

The VAT reverse charge for construction services is being introduced because HMRC says it will combat fraud. Currently, construction businesses can charge VAT for the services they supply but then disappear without paying their VAT bill. They can pocket the 5% or 20% tax they’ve charged instead of passing it on to HMRC. It means such dishonest companies can offer customers an unfair discount which makes their business rivals uncompetitive as a result.

HMRC says the construction industry is targeted by organised criminals in this way. By shifting the VAT charge up the supply chain, HMRC aims to make this kind of fraud impossible.

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