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New VAT Procedures in place from 1 March 2021

From 1 March 2021 the Government are introducing a major change to the way VAT is collected in the building and construction industry.

If you are a CIS subcontractor:

As a VAT registered Sub-contractor supplying services that are reported under the Construction Industry Scheme (CIS) you will no longer receive the VAT element of your sales or account for this on your VAT return. Instead the contractor will now pay HM Revenue and Customs (HMRC) the VAT on your behalf.

What do you need to do?
When raising your invoice to the contractor after 1 March 2021, you will no longer charge VAT in the normal way. However, you will need to specify on your invoice the amount and rate of VAT that would normally be due and that the contractor will need to declare on your behalf. You should also include the invoice wording “Reverse charge: customer to pay VAT to HMRC”.

An example:
You are invoicing the contractor for £1,000 of standard rated work that is subject to CIS. You would normally invoice them £1,000 + £200 VAT = £1,200 less 20% CIS of £200 = £1,000 received.

Under the new rules, you will invoice the contractor £1,000 with a note that £200 should be paid to HMRC by them. You will receive £1,000 less 20% CIS of £200 = £800, but you will not be required to pay over any VAT to HMRC.

Things to consider
As you will no longer be receiving the VAT element of your invoice this may have implications on your business cash flow and may be worth reviewing your current VAT periods and schemes.

If you are a CIS Contractor

As you are a VAT registered Contractor that receives services that are reported under the Construction Industry Scheme (CIS), you will no longer pay the VAT element of an invoice to your sub-contractors. Instead, you will be required to withhold the VAT element and pay this over to HM Revenue and Customs (HMRC) directly on your own VAT Return, rather than paying this to the sub-contractor.

What do you need to do?
You need to ensure that your sub-contractors are aware of this change and understand that you will be withholding the VAT element of their invoice in order to pay this over to HMRC.

When it comes to completing the VAT Return, you will be required to show the sub-contractor VAT in Box 4 as normal, but also include this in Box 1 of your VAT Return.

An example:
The sub-contractor send you an invoice for £1,000 of standard rated work that is subject to CIS. You would normally pay the subcontractor £1,000 + £200 VAT = £1,200 less 20% CIS of £200 = £1,000.

Under the new rules, you will pay the subcontractor £1,000 less 20% CIS of £200 = £800 received, and the £200 VAT will be withheld by you to pay over to HMRC on your next VAT Return on behalf of the subcontractor.

Things to consider
As you will not be paying the VAT to each subcontractor, you will need to ensure that this kept aside in order to pay over to HM Revenue and Customs on the next VAT Return.

Accounting Software

Whether you are a contractor, subcontractor, or both, if you currently use Accounting Software to invoice and process VAT Returns, then please contact us to discuss how the changes should be processed in your software package.

We are holding free webinars discuss the upcoming changes in more detail and answer any questions you may have. Please book via Eventbrite.