VAT REVERSE CHARGE: IMPORTANT UPDATES CONTRACTORS AND SUBCONTRACTORS NEED TO KNOW
Have you seen the amount your products carry as a tax? Whenever you purchase any item, the total amount the product carry is the actual sum of original cost of the product along with some value added tax. All of the items that are either purchased or on sale have a specific amount of tax on them. This tax may be called VAT. VAT refers to Value Added Tax. It is normal and straight-chain of paying tax. But VAT Reverse Charge is a phenomenon that needs to be addressed.
In the following article you will be going through a couple of things that must be acknowledged while considering VAT Reverse Charge.
Are VAT and VAT Reverse Charge Different From Each Other?
Construction industries offer different tasks that are related to amendments in a building or constructing it from the very first brick. No matter what the work actual is, it may carry a specific amount of VAT and VAT Reverse Charge along with it. Both VAT and VAT Reverse Charge are applicable on goods as well as services.
The VAT and VAT Reverse charge, on the whole, maybe 5% or 20%. In some goods and services, you have to pay only 5% of the VAT. For some other specified goods and services, you have to pay 20% of the total cost as VAT. But giving 5% or 20% is not a big issue at all because you can claim back your additional tax through a specified process which is termed as VAT Reverse Charge.
The collected VAT and VAT Reverse Charge will be transferred to the main government agency after a certain time. HMRC- Her Majesty’s Revenue and Customs is the main governmental agency that ultimately collects VAT. In other words, either the tax is paid as VAT or as VAT reverse charge, it is HMRC who finally receives the taxes.
In the cycle of goods production to goods delivery and distribution, VAT is added at each step. The same formula applies to the services that are a construction organization provides. VAT comprises twenty percent of the total cost. This twenty percent is added to the original cost of the product. This tax needs to be pay by the end-user to HMRC.
This process looks simple because when you are buying a particular product you are finally paying the tax at the same moment. The chain goes longer as more people start dealing with each other. But the basic members that are involved are End User, Supplier and HMRC. This can be demonstrated as follows:
“Either the tax is paid as VAT or as VAT reverse charge, it is HMRC who finally receives the taxes.”
VAT Reverse charge is the phenomenon in which the customer or end-users account for the VAT directly to the HMRC. The intermediate supplier or sub-contractors has nothing to do with the collection of tax. The supplier will not deduct the specified VAT from the invoices issued to the customers. The end-users themselves have to submit the dues to HMRC as their responsibility.
The idea of a VAT Reverse Charge is not a new thing at this time. This idea has been proposed years ago but was not applicable due to different conditions. However, the VAT Reverse Charge process has been effective since 1st March 2021. All the transactions done by this date will follow the VAT Reverse Charge process if applicable.
“The VAT Reverse Charge process has been effective since 1st March 2021″
You requested a service that was related to the construction of your house in the UK, London. The invoice that was issued to you came out to be £1000 with 20% VAT on the services provided. The total cost came out to be £1,200. This additional twenty percent would be paid to HMRC and not the supplier in case of VAT reverse charging.
Construction Industry Scheme
One thing that should be kept in mind is that your contractors and subcontractors should be VAT registered. They may also be CIS registered which allows both to work for them. The CIS allows contractors to cut a specified amount of money from the sub-contractor’s invoice as an advance payment of tax to HMRC. This occurs when the normal VAT rule applies. But if the sub-contractor is CIS registered, he can pay this specific amount directly to HMRC.
You must register as a contractor according to CIS, if
You pay subcontractors to do construction work
Your business does not do construction work but you usually spend more than £1 million a year on construction.
You many be a sole trader, in a partnership, or own a limited company. If you are not sure about further details regarding your registration process you may visit the CIS online portal and clear your doubts. You may need some particulars of yourself like email address, employee reference number, and accounts office reference number for signing in.
Net of tax mostly carries National insurance, mandated tax, Medicare contributions, and retirement funds.
You have to register yourself for VAT if,
When You Must Use the VAT Reverse Charge?
Before heading towards different questions arising in your mind about all this stuff, let us just clarify the services regarding construction work that apply the rule of VAT Reverse Charge to them. The following are different services that apply VAT Reverse Charge along with different goods being supplied. The goods alone don’t carry this charge.
- Establishing, changing, amending, enlarging or knocking down, an infrastructure or a building including offshore installation and services.
- Establishing, changing, amending, enlarging or knocking down any work that includes a particular piece of land like road work, underground electronic work, gas pipelines, underground water lines, sanitation systems, wells and runway.
- Emplacement of ventilation systems, heating system, cooling systems, drainage systems and sanitation systems in buildings.
- Wiping up different leftovers that were produced as a result of establishing, changing, amending, enlarging, dismantling or adorning a building or house.
- Embellishing a particular building by painting and decorating it walls with different art work.
For applying VAT Reverse Charge should obey all the clauses given under 55A VAT ACT 1994!
When You Must Not Use the VAT Reverse Charge?
If your services include the following things VAT Reverse Charge will not be applicable. In other words, you can’t claim to do payments under the VAT reverse charging process.
- Drilling holes for extraction of oil or natural gas
- Extracting minerals by making bores and tunnels
- Manufacturing components for engineering sites that may include different equipment for plants and machinery.
- Manufacturing components for lighting systems, heating systems, air- conditioning systems, and sanitation systems, and drainage systems.
- Repairing sculptures that might be a sign of artwork to the building
- Installing security systems and security alarms
- Emplacing shutters, blinds and seats.
Then in all of the above cases, you can’t claim to make payments under 55A VAT ACT 1994.
When To Apply VAT Reverse Charge?
If you are considering taking advantage of the VAT Reverse Charge you have to go through the following data to figure out either you apply to it or not.
1. You are a contractor and you also fall within the scope of CIS.
If yes, then the VAT Reverse Charge applies, and if not, then the normal VAT rule applies. Applying a VAT Reverse Charge on your supplies means you will be paying VAT on the goods you provide to the supplier. You will not be charging the same amount of VAT to the sub- contractor. You might feel about a little imbalance in the cash flow over here but don’t worry it will soon be recovered.
What if you are a sub-contractor?
You are a sub-contractor and VAT Reverse Charge invoices have been issued to you. Now this means that you are receiving goods and services at the original rate that does not include VAT. It does not mean that you don’t have to pay tax. It simply means that you will be paying VAT to HMRC in place of the contractor. In this way, there will be a complete balance in your cash flow.
2. You are a sub-contractor and you are VAT registered.
If yes, VAT Reverse Charge is applicable. If not, normal VAT rules apply. An important thing that should be mentioned over here is about the rate at which the deal between the contractor and sub-contractor gets finalized. Is it a standard rated or reduced rated?
Standard rated means that a twenty percent VAT is issued. VAT Reverse charge is applicable in this case.
Reduced rated means that a five percent VAT is issued. VAT Reverse Charge is also applicable over here.
But if you are zero-rated then normal VAT values are considered.
3. You are a customer and you are VAT registered.
If yes, VAT Reverse Charge gets applicable. But if no, normal VAT rule apples.
4. You are a customer and you are CIS registered.
To keep an eye on this issue, subcontractors and contractors should be aware of different information regarding CIS registration. The invoices carry a specific amount of deduction regarding the reverse charge. If your customer is CIS registered then a VAT Reverse Charge should be mentioned in the invoices generated.
The contractor and sub-contractors may use the CIS online portal, if you are not capable of providing evidence to your registration. You have to provide your name and reference number to complete the procedure.
5. You are a customer and an end-user as well.
If you are, the normal VAT rule applies and you cannot account for VAT Reverse Charge. But if you are not an end-user and you have to pass the construction work to some other end-user then the VAT Reverse Charge applies to all the expenditures being done by you. It simply means that you were an intermediate supplier.
To avoid any sort of confusion regarding this consideration it is mandatory to do paperwork. In this paperwork, the end-user or the final customer verifies that he is the end-user and has to state the following phrase as a compulsion.
“We are an end user for section 55A ACT 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for reverse charge.”
How are the New Rules Applied?
New rules regarding VAT Reverse Charges are applied differently to the different services that are provided. They also apply differently to the persons responsible for doing services.
VAT Reverse Charge applies to those construction services that are provided under the approval of the CIS.
If you are a VAT Registered constructor and it applies to your work and you have to submit the dues through your subcontractor to HMRC.
If you are a subcontractor, you charge yourself for the services and in the end pay VAT directly to HMRC.
In case your construction business is not VAT registered,
- You cannot go for the VAT Reverse Charge option.
- You have to obey the normal VAT rules that will apply to all of the invoices issued to you.
- You also have to mention the details regarding your VAT registration before you even start to do work.
This simply means that everything should be crystal clear before and after the deal is done.
Proper paperwork is required to save you as well as your constructor from any sort of mismanagement happening so far. The basic goal should be mentioned over here which supports the statement:
“TO MAKE WORK FREE OF ERROR AND FRAUD”
When a complete record is maintained for the sale and purchase is done it seems impossible for any loophole to occur. A complete record of all the transactions with corresponding details helps the person at every stage involved in this cash flow cycle to comprehend the details better.
Suppose a person claims to be eligible for a VAT Reverse Charge. He holds an employment business and provides services accordingly. VAT Reverse Charge will not be applicable in this case even if the services fall in the category of CIS-approved VAT Reverse Charge services.
These businesses are not considered for the reverse charge because they provide their staff for construction purposes only. They do not provide services related to construction work. They are not considered because they are responsible for providing only staff members that are employees of their business.
How Will the Changes Affect You?
If you are a contractor:
Let’s suppose that you are a contractor and you are supplying goods to the sub-contractor for a particular work that you both were dealing in. the goods that you purchased from another supplier carrying a specific amount of tax in it. Now when you are selling these goods to the sub-contractor you cannot demand VAT in that selling process. In VAT Reverse Charge, as the sub-contractor accounts for the VAT to HMRC directly he will not be paying you the corresponding VAT.
You might feel like giving out more money in terms of giving it in the form of VAT to the initial supplier and not reclaiming it back from the sub-contractor as the sub-contractor is applicable for VAT Reverse Charge. The cash flow to you might seem to be not fair. But keep in mind that the HMRC will be issue Reverse charge payment back according to the amount mentioned in the invoices. So to keep the whole cycle working, you have to take care of the invoices that are being issued at a very initial step to make it mistake-free.
HMRC is responsible for returning the amount to contractors and main suppliers after every three months. But if you are making supplies and purchase on daily basis, reclaiming money after three months seem to be a big fluctuation in purchase and sale graph. To keep you under no external fluctuation HMRC will be now returning your dues by the end of every month. This means, you can claim your money to HMRC once the month gets completed.
You are not charging your sub-contractor for VAT but still you have to mention the amount properly in your invoices. So that the HMRC holds a proper set of information regarding the cash flow.
If you are a sub-contractor or final customer:
In case you are the person who is finally receiving all the goods and services and you are fulfilling all the requirements of being an end-user, a VAT Reverse Charge is applied to you. You will receive the invoices issued by the corresponding contractors that supplied their items to you at the original rate and not adding tax in it. But that particular amount of tax is supposed to be mentioned in the invoices separately.
The issued invoices comprise of different columns and boxes in which services and goods are mentioned with the corresponding reduced rate or standard rate. This means that certain services may be five percent and certain services twenty percent considered in terms of VAT. So, it is important to mention every detail with full verification.
Now the proper invoices are handed over to you and you will be paying the original amount to the contractor. The additional charges that would be mentioned on the invoice have to be submitted by you to HMRC and the contractor would be playing no role in this transaction. VAT Reverse Charge is a direct link between you and HMRC and the contractor is responsible for making the invoices in which proper details are mentioned.
How To Prepare for Change?
In some cases, it happens that during a certain construction work the application of normal VAT value changes into VAT Reverse Charge. In some other situations, the exact opposite happens. Now, this thing is a cause of confusion. Because contractors and sub-contractors were working on a different format before. Now the process requires to be changed.
In such cases, the decision can be made by mutually accepting each other’s proposal. The contractor and sub-contractor should agree on a single statement and follow them. However, all the transactions made after 1st March 2021 that applies VAT Reverse Charge on them should be fulfilled accordingly.
“If the deal was done before 1st March 2021 and the payment will be done until 30th May 2021, a normal VAT rule will be applied to the transaction.”
Or take a look into a deeper perspective. Before 1st March 2021, when the concept of VAT Reverse Charge was not introduced people were getting charged on normal VAT values. After 1st March 2021, the format changed and the VAT reverse charging process became applicable. Now if a certain contractor and sub-contractor were dealing in between these date transitions, what is going to be the final deal?
“If the deal was done before 1st March 2021 and the payment will be done after 30th May 2021, VAT Reverse Charge will be applied.”
If the deal was done before 1st March 2021 and the payment will be done till 30th May 2021 then a normal VAT rule will be applied to the transaction. But if the deal was done before 1st March 2021 and the payment will be done after 30th May 2021, VAT Reverse Charge will be applied.
If you are stuck between these date transitions and don’t know what to do? Simply contact us and we will help you in acquiring proper knowledge and procedure for the given scenario.
What If VAT Reverse Charge Does Not Apply To You?
If the VAT Reverse Charge does not apply to you it simply means that the normal VAT rule applies to all the transactions that are made. The simple VAT value contains an additional five percent tax that will be applied to all your invoices. It is mandatory to mention such details on the invoices.
If a misunderstanding occurs regarding payment, the issue must be resolved by the dealers. The VAT applied services should not be considered in the VAT Reverse Charge block. If a mistake occurs HMRC will try to negotiate the given problem and facilitate both parties.
If you applied to the VAT Reverse Charge process and the contractor had already deducted the dues containing VAT, you can simply ask the contractor about the details. To avoid errors, the invoices should be issued considering proper details. If you become aware of the situation before paying VAT then don’t pay VAT to the contractor at all.
But if you had made payment and soon after that you realized about the circumstances, get in touch with your constructor and claim for payment refund. Keep in mind whether the transactions are done on point or with errors the invoices should contain complete details. An amended invoice can be issued to the sub-contractor again and the cash flow becomes balanced.
“…whether the transactions are done on point or with errors, the invoices should contain complete details.”
In this article, we have tried to give you a complete guide regarding comprehending the VAT Reverse Charge as a whole. Earning money and doing business requires a lot of knowledge and how instinct. If you don’t have proper knowledge regarding the post at which you are working, you might face some fraud issues. Misusing your sub-workers, no doubt, is a crime but self-security should be learned.
Lack of knowledge and guidance in dealing with VAT Reverse Charge could lead to fraud issues or financial trouble. Taking help from an expert professional can help you get through the process. Legend Financial has a team of expert who can assist you in processing on Normal VAT or VAT Reverse Charge for your business. Send us a message or schedule an appointment with us today!
The Value Added Tax (Section55A)(Specified Services) Order 2019. (2019, June 14). Statutory Instruments, 2. Retrieved March 25, 2021, from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/808856/uksi_20191015_en.pdf
VAT: Check When You Must Use The VAT Reverse Charge For Bulding and Construction Services. (n.d.). Retrieved March 25, 2021, from https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services