A Practical Guide To Reverse VAT - Build UK

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A Practical Guide to Reverse VATIf your business is registered with the Construction Industry Scheme (CIS) Reverse VAT willaffect you.1.2.3.4.5.6.7.8.9.ContentsWhat is Reverse VAT?Will Reverse VAT affect your business?What is an End User?Commercial End UsersDomestic End UsersWhen will Reverse VAT begin?The Current VAT SystemThe New Reverse VAT System10. Construction services subject to ReverseVAT11. What else does Reverse VAT apply to?12. Services NOT subject to ReverseVAT13.What else does Reverse VAT NOT apply to?14.Invoicing for Reverse VAT15.Impact on Cash Flow - Tier 1 Contractors16.Impact on Cash Flow - Tier 2 Contractors17.Tier 2 – Example 118.Tier 2 – Example 219.Tier 2 – Example 320.VAT Returns under Reverse VAT21.Vat Return Periods22.Enforcement23.Checklist (part 1) - Get Ready for Reverse VAT24.Checklist (part 2) - Get Ready for Reverse VAT25. Information that must be included on invoicesVersion 01 2019

What is Reverse VAT?From 1 October 2020, HMRC is introducing the Construction Services Domestic ReverseCharge known as “Reverse VAT” or “Reverse Charge VAT”.This is a new way of collecting VAT from businesses that provide construction serviceswithin the scope of the Construction Industry Scheme (CIS), in an attempt to ensure theGovernment is recovering the correct amount of VAT from the construction sector.The word ‘domestic’ in Construction Services Domestic Reverse Charge refers to workcarried out within the UK.This means that VAT will no longer be paid to businesses in the supply chain for providingconstruction services unless they are providing those services directly to an End User.Instead the responsibility for paying VAT to HMRC will sit with the business thatreceives the construction services.Back to Contents PageVersion 01 2019

Will Reverse VAT affect your business?If your business is registered with the Construction Industry Scheme (CIS) Reverse VAT willaffect you.Contractors working for other contractors will no longer receive VAT on the services theysupply but will be paying VAT to suppliers of plant and materials.You may move from owing VAT to HMRC each quarter to being due a VAT repayment fromHMRC each quarter.This could have a major impact on your cash flow! Cash that you may use to pay VAT on supplier invoices Cash that you may use as working capital Cash that will no longer be available under Reverse VATBack to Contents PageVersion 01 2019

What is an End User?An End User is usually the client which may be: A developerThe final user or occupier of a building or structureDeemed “contractors“ under CISDomestic customers and consumersIn Management Contracting the business that is responsible for providing the building orstructure to the End User is usually the main or tier 1 contractor.In Construction Management the businesses responsible for providing the building orstructure to the End User may be specialist contractors.Back to Contents PageVersion 01 2019

Commercial End UsersCommercial clients have the responsibility to confirm to their suppliers that they are anEnd User and that VAT should be charged in the normal way.Suppliers to commercial End Users should ensure they receive, and keep a record of,written confirmation from each End User on each project.An example of suitable wording is:We are an End User for the purposes of section 5 5 A VAT Act 1994 reverse charge forbuilding and construction services. Please issue us with a normal VAT invoice, with VATcharged at the appropriate rate. We will not account for the reverse charge.Back to Contents PageVersion 01 2019

Domestic End UsersDomestic clients or consumers are not required to confirm their status as an End User andVAT should be charged in the normal way.Suppliers to domestic End Users are advised to include a statement in their terms &conditions and invoices.An example of suitable wording is:We assume that you, the customer, is an End User for the purposes of section 5 5 A VAT Act1994 reverse charge for building and construction services and we will charge VAT at theappropriate rate unless you inform us otherwise.Back to Contents PageVersion 01 2019

When will Reverse VAT begin?Reverse VAT will apply to all relevant invoices, authenticated tax receipt or self-billinginvoices dated on or after 1 October 2020, regardless of when the contract for theconstruction services began or when the work was carried out.Invoices dated up to 30 September 2020 should include the appropriate rate of VAT underthe current system, which can be paid in full up until 31 December 2020.Where a client or customer issues an authenticated tax receipt or self-billing invoice which iscertified before 30 September 2020, it should include the appropriate rate of VAT under thecurrent system which can be paid in full up until 31 December 2020.If payment is made after 1 January 2021 and the work is subject to Reverse VAT underthe new system, the invoice, authenticated tax receipt or self-billing invoice will need tobe reissued.Back to Contents PageVersion 01 2019

The Current VAT systemBusinesses with a turnover of more than 85,000 are required to register for, and charge, VAT on goods andservices that they provide. You can register voluntarily if your business turnover is below 85,000 and youmust pay HMRC any VAT you owe from the date they register you.Everyone is obliged to pay the appropriate amount of VAT on the goods and services provided by any otherbusiness that is VAT registered and the company VAT number and amount of VAT charged should be clearlyshown on any invoices.Businesses that are VAT registered and provide construction services to other contractors currently charge, andreceive, VAT in all payments.Businesses that buy construction services from VAT registered businesses currently pay VAT in all payments.At the end of each quarter, a VAT registered business will submit a VAT return to HMRC which shows theamount of VAT they have charged or received and the amount they have been charged or paid out.The figures required to be shown depend on if a business operates cash accounting (where they only includecash actually received or paid) or standard VAT accounting (where they include VAT on invoices regardless ofwhether it has actually been received or paid).The difference betw een the tw o figures determines if the business has to pay or receive moneyHMRC which is usually due 1 month and 7 days after the end of the quarter.Back to Contents PageVersion 01to 2019

The new Reverse VAT systemFrom 1 October 2020, unless providing construction services to an End User, a businesswill no longer receive VAT on construction services within the scope of CIS. End Usersonly will pay out VAT on those construction services.Businesses with a turnover of more than 85,000 will still be required to register for VAT.VAT will still be applied at the appropriate rate, however where construction services areprovided to anyone other than an End User, the supplier of those services will no longerneed to account for the VAT element.Invoices will show the value of the construction services provided and the VAT elementmust state that it is subject to Reverse VAT.The customer of the construction services will then be responsible, and account for, theVAT element of these services in their VATreturn.Back to Contents PageVersion 01 2019

Construction Services subject to Reverse VATYou will have to apply the reverse charge if you supply any of these services at the standard or reduced ratesthat are reported under CIS: Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whetherpermanent or not), including offshore installation services Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part ofthe land, including (in particular) walls, roadworks, power lines, electronic communications equipment,aircraft runways, railways, inland waterways, docks and harbours Pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of landdrainage, coast protection or defence Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supplyor fire protection systems in any building or structure Internal cleaning of buildings and structures, so far as carried out in the course of their construction,alteration, repair, extension or restoration Painting or decorating the inside or the external surfaces of any building or structure Services which form an integral part of, or are part of the preparation or completion of the servicesdescribed above - including site clearance, earth-moving, excavation, tunnelling and boring, laying offoundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and otheraccess worksBack to Contents PageVersion 01 2019

What else does Reverse VAT apply to?In addition Reverse VAT applies: To plant hire services which include an operator To specialist contractors providing labour to fulfil a construction service To materials provided as part of any construction service.If any of the services being supplied within a contract are subject to Reverse VAT thenall other services within that same contract will also be subject to Reverse VAT.If there is any doubt whether Reverse VAT applies to a construction service, if the supplier ofthe services is VAT registered and the payments are subject to CIS, Reverse VAT will apply.This is significant difference between CIS and Reverse VAT.Back to Contents PageVersion 01 2019

Services NOT subject to Reverse VAT Drilling for, or extracting, oil or natural gas Extracting minerals (using underground or surface working) and tunnelling, boring, or construction ofunderground works, for this purpose Manufacturing building or engineering components or equipment, materials, plant or machinery, or deliveringany of these to site Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage,sanitation, water supply or fire protection systems, or delivering any of these to site The professional work of architects or surveyors, or of building, engineering, interior or exterior decorationand landscape consultants Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic Signwriting and erecting, installing and repairing signboards and advertisements Installing seating, blinds and shutters Installing security systems, including burglar alarms, closed circuit television and public address systemsBack to Contents PageVersion 01 2019

What else does Reverse VAT NOT Apply to?Reverse VAT does also not apply: If you are providing construction services to an End User If you are providing materials or goods only To plant hire where an operator is NOT provided To employment businesses who supply staff and are responsible for paying the temporaryworkers they supply To payments by a joint venture to the construction firms providing staff to the jointventure projectBack to Contents PageVersion 01 2019

Invoicing for Reverse VATInvoices for construction services which are subject to Reverse VAT must include: All the information that is required on a VAT Invoice - see here A note against the services provided where Reverse VAT applies and that the customer isrequired to account for the VAT. An example of suitable wording is:Reverse Charge: Customer to pay the VAT to HMRCIf a credit note is issued for construction services subject to Reverse VAT it must include anote showing the VAT element. An example of suitable wording is:Reverse Charge: Customer to account for the VAT adjustment to HMRCYour accounting software may have a Reverse VAT option or you may need to upgradeto a new version that provides a Reverse VAT option.Back to Contents PageVersion 01 2019

Impact on Cash Flow – Tier 1 ContractorsProviding Construction Services to End Users Businesses that only, or mainly, work for End Users will continue to receive VAT for theconstruction services they provide to those End Users They will not pay VAT on any invoices received for construction services and will beresponsible, and account for, the VAT element of those invoices They will continue to pay VAT on invoices for any non-construction services, plant andmaterials provided by VAT registered businessesIt is likely that cash flow in the short term will improve however VAT payments toHMRC at the end of each quarter will increase.Businesses affected in this way are likely to be tier 1 contractors.Back to Contents PageVersion 01 2019

Impact on Cash Flow – Tier 2 ContractorsBusinesses that usually work for other contractors will no longer receive VAT payments forany construction services provided.They will not pay VAT on any invoices received for construction services and will beresponsible, and account for, the VAT element of those invoices.They will continue to pay VAT on invoices for any non-construction services, plant andmaterials provided by VAT registered businesses.Businesses affected in this way are likely to be tier 2 contractors.Back to Contents PageVersion 01 2019

Impact on Cash Flow –Tier 2 Example 1A 40 million turnover cladding contractor provides specialist construction services to anumber of tier 1 contractors. The business employs few sub-contractors but purchases asignificant amount of materials from VAT registered businesses.It is likely that cash flow will be significantly negatively affected as the business will not bereceiving VAT payments from its customers but will still be liable to pay VAT to its suppliers.This business will probably become a repayment trader owed money from HMRC at theend of each quarter.Businesses affected in this way are likely to be specialist contractors or subcontractors that provide supply and fix construction services and employ a limitednumber of sub-contractors.Back to Contents PageVersion 01 2019

Impact on Cash Flow –Tier 2 Example 2A 2 million turnover interior fit out company provides specialist construction services to anumber of tier 1 and tier 2 contractors. The business employs numerous VAT registeredsub-contractors and purchases a small amount of materials.It is likely that cash flow will be slightly negatively affected as the business will not bereceiving VAT payments from its customers but will not pay the VAT on constructionservices from its suppliers.This business will probably become a repayment trader owed money from HMRC at theend of each quarter due to general business expenses.Businesses affected in this way are likely to be specialist contractors or subcontractors that may supply and fix but also employ sub-contractors.Back to Contents PageVersion 01 2019

Impact on Cash Flow –Tier 2 Example 3A 200,000 turnover ground clearance contractor providers construction services to EndUsers, tier 1 and tier 2 contractors. The business makes very few payments to other VATregistered businesses.It is likely that cash flow will be negatively affected as the business will not be receiving VATpayments.VAT returns are likely to be Nil at the end of each quarter.Businesses affected in this way are likely to be specialist contractors and subcontractors that purchase a limited amount of materials and do not employ subcontractors.Back to Contents PageVersion 01 2019

VAT Returns under Reverse VATServices provided or received under the normal accounting system should be included inVAT returns as usual.Where services provided are subject to Reverse VAT: Do not include the VAT element in box 1 of the VAT return Include the net value of invoices issued in box 6Where services received are subject to Reverse VAT: Do include the VAT element in box 1 of the VAT return Do include the VAT element in box 4 of the VAT return Include the net value of invoices received in box 7The Cash Accounting Scheme cannot be used for the supply of services that are subject tothe reverse charge as no VAT is actually paid by customers to suppliers.Businesses can use the Cash Accounting Scheme for suppliers not subject to Reverse VAT,however it may be that there is no longer any benefit to cash flow and they may wish towithdraw from the scheme.Back to Contents PageVersion 01 2019

VAT Return PeriodsThe majority of businesses submit quarterly VAT returns.Businesses that are regularly owed money by HMRC on their VAT return are considered‘repayment traders’ and can move to monthly VAT returns which will speed up anypayments due.Requests to move to monthly VAT returns should be made by signing into a VAT onlineaccount.HMRC will action requests promptly so a business should consider when would be the righttime to make a request as VAT may be owed from the previous quarters’ return.Depending when the request is made there may be a 2 monthly return period and thereaftermonthly returns or if the request is made at the end of a quarter, a quarterly return as usualand thereafter monthly returns.A business that knows it will become a repayment trader after 1 October 2020 canapply at any time to move to monthly returns.Back to Contents PageVersion 01 2019

EnforcementHMRC has stated that it will apply a light touch in dealing with any errors made in the first 6months of the new legislation, as long as a business is trying to comply with the newlegislation and has acted in good faith.Any errors need be corrected as soon as possible, as the longer under declared orovercharged sums remain outstanding, the more difficult it may be to correct or recoverthem.Penalties will only be considered if a businesses is deliberately taking advantage of thechanges.HMRC has published guidance online VAT: domestic reverse charge for building andconstruction services.Back to Contents PageVersion 01 2019

Checklist (part 1) – Get Ready for Reverse VAT Identify which of your contracts will be subject to Reverse VAT which will be: Where you are supplying construction services to anyone other than an EndUser Where a VAT registered business is supplying you with construction servicesand you are not an End User Identify which of your clients and customers is an End User and ask them toconfirm that in writing Let your commercial clients and customers know you are aware of Reverse VATand will invoice them as appropriate Confirm your payment terms to your clients and customers as cash flow willbecome increasingly important Update your terms and conditions for domestic clients and consumersBack to Contents PageVersion 01 2019

Checklist (part 2) – Get Ready for Reverse VAT Contact your sub-contractors and suppliers of construction services Are they aware of Reverse VAT and the impact it may have on their cash flow? Send them this guidance note! Check your accounting systems and software can deal with Reverse VAT Update your template invoices to refer to Reverse VAT where appropriate Consider the impact on your cash flow and if you need to take any action Determine if you should move to monthly VAT returns and when would suit yourbusiness Check you have the details to log on to your VAT online account Ensure all your relevant staff are familiar with Reverse VAT and how it will operateBack to Contents PageVersion 01 2019

Information that must be included on Invoices A unique identification number Your company name (in full and for Limited companies as it appears on the certificate ofincorporation), address and contact information The company name and address of the customer you are invoicing A clear description of what you are charging for The date the goods or service were provided (supply date) The date of the invoice The amount(s) being charged VAT amount if applicable The total amount owed Return to Invoicing for Reverse VAT pageBack to Contents PageVersion 01 2019

A Practical Guide to Reverse VAT 1. Contents 2. What is Reverse VAT? 3. Will Reverse VAT affect your business? 4. What is an End User? 5. Commercial End Users 6. Domestic End Users 7. When will Reverse VAT begin? 8. The Current VAT System 9. The New Reverse VAT System 10. Construction services subject to Reverse VAT 11. What else does Reverse VAT apply to? 12. Services NOT subject to .

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