VAT Reverse Charge 2021
As of March 1st of this year, UK VAT will be levied on companies registered for VAT under the Construction Industry Program (CIS). This decision was designed to combat VAT fraud in the construction industry and has a significant impact on VAT compliance and the company’s cash flow.
Originally scheduled for October 1, 2019, the move had been postponed to October 1, 2020 due to business readiness concerns. The coronavirus pandemic and Brexit have extended the deadline to March 2021. While the VAT reversal is not specifically related to Brexit, you will find our recent article on VAT changes since the end of the Brexit transition period useful.
What Is It VAT Reverse Charge?
Basically, this means that the end customer who buys the building technology or materials has to bear the corresponding VAT for himself and not for the supplier. The VAT is paid directly to HMRC, eliminating the supplier’s liability.
Note that reverse VAT invoicing is only applicable to UK companies providing construction services in the UK.
What Are The Main Conditions?
Reverse invoicing is used throughout the supply chain until a customer receiving the service or material is no longer tied to the design.
The return load should be applied when all of the following conditions are met:
The building materials and/or services were supplied to an end customer in the UK with VAT.
The customer and the supplier are neither connected nor connected.
The VAT rate applied is the standard rate or the reduced rate.
The supplier and the customer are registered as VAT and CIS.
An infographic showing the terms of applying reverse VAT.
Why Were The Measures Introduced?
VAT fraud costs the UK Treasury Department over £ 100 million a year. Unfortunately, this fraud is often committed by organized criminals in the construction industry who are attracted by the possibility of making an additional (illegal) profit of 5% or 20%.
In the past, unscrupulous business leaders charged VAT to provide a specific service before they stopped paying their VAT bill. Reverse charging of sales tax causes the payment of sales tax to go down the supply chain, making this type of scam nearly impossible.
Investment programs for taxpayers are not new; they are simply new to the construction industry. Similar systems have already been introduced for companies such as computer chip retailers, electricity wholesalers and cell phone providers.
For Which Services Is VAT Being Reversed?
Any service that is an integral part of the following activities or their preparatory work is subject to VAT investment. These services include:
- Earthworks or site cleaning.
- Build, repair, modify, enlarge, or destroy permanent or non-permanent structures, including those installed at sea.
- All work (including maintenance) relates to walls, road works, railways, railroad tracks, docks and ports.
- The installation of lighting, heating or air conditioning systems, ventilation systems, electricity or water supply, sanitation, drainage or fire protection in any building or structure.
- All work (including maintenance) relates to the water network, sewage disposal, inland waterways, wells, reservoirs, pipelines, land drainage systems, coastal protection or defence.
- Painting and/or decoration of building or construction surfaces, whether inside or outside.
- All work (including maintenance) in connection with electronic communication devices or power lines.
- Internal cleaning of buildings and structures as part of a construction, repair, extension, conversion or restoration project.
In contrast to the CIS regime, VAT cancellation applies not only to all of the items listed above but also to all building materials that are used directly for the order.
For further details, please contact Total tax Accountants.