By Michelle Accounticorn Morris on 25/01/2021 12:00:00

VAT Reverse Charge Scheme

Construction Sector faces changes to VAT legislation from 1st March 2021

If you operate within the construction sector as a buyer or a supplier, you need to be aware of and prepared for the forthcoming changes surrounding CIS VAT payments.

The new domestic reverse charge VAT scheme comes into force on 1st March 2021 and has been implemented to reduce VAT fraud in the construction industry. It is estimated that ‘missing trader’ fraud currently costs the HMRC £80million / year, so you can see why they’re taking these changes so seriously. *

The new UK government legislation will affect around 150,000 businesses across the country in a bid to tighten regulations and prevent companies from charging VAT and then going ‘missing’ before paying their dues.

The new system shifts the responsibility to pay VAT from the supplier to the customer. It will only apply to business-to-business transactions within the construction sector where both parties are VAT registered.

So, suppliers will need to adjust their VAT invoices to reflect the domestic charge whereas customers will need to account for the VAT payment as part of their own VAT return, rather than paying the supplier.

Whilst the HMRC are taking a reasonable approach with a grace period from 1st March – 1st September 2021 to adapt to the new system correctly, you must show that you are acting in good faith to understand and comply with the new rules. Following this introductory phase, penalties will be issued to those businesses who are not operating in line with the reverse charges scheme.

One of the most important points to consider for suppliers is that customers will no longer be paying the VAT element of their invoices, therefore reducing the value of gross payments coming into the business. Cashflow will need to be carefully managed during this transition.

Organisations on both sides of the fence will need to ensure their accountancy software is capable of processing these new transactions and is updated accordingly. Staff will also need to be educated regarding these adjustments.

The good news for Ellacott Morris clients is that we’re all up to speed when it comes to these new reverse charges and that Xero accounting software (the package we use and recommend to all our clients) is also ready for the changes that will be implemented on 1st March.

If you operate within the construction sector and are confused or concerned about preparing your business for these changes, contact us today. We’re here to help with the transition, the day-to-day practicalities, the bigger cashflow picture, educating your staff and more.

These new rules will help to put everyone operating within this sector onto a more level playing field, preventing the fraudsters from having their cake and eating it, so it’s a change that we welcome and hope you will too.

We want to reduce the stress this change in legislation may cause and support your business towards this new way of working. Get in touch today….

By Michelle Accounticorn Morris on 25/01/2021 12:00:00