Blog 033 - Reverse Charge VAT

Have you heard about the changes to VAT coming in March? Hopefully you have, but if you haven’t, I wouldn’t blame you, the accountancy profession seems to have rested on its laurels in the hope of the Government further delaying the introduction of the changes. I have spoken with multiple Specialist Contractors over the last month, all of them felt they were under informed about the changes and hoped for better communication from their business accounting advisors.

I am not an accountant, and I typically have a very poor concept of VAT and VAT returns, I have the benefit of working with management accountants who worry about that, but I felt compelled to try and bring a basic guide to the changes out for those smaller specialists that do not have in-house accountants and have felt underwhelmed by their fee earning advisors.

What is Reverse Charge VAT?

Reverse Charge VAT is a change to the VAT procedure which makes the end employer responsible for paying the VAT accumulated in the chain of construction sales. It is essentially an extension of the CIS scheme, where the tax is paid at the top of the chain. Your invoice to your client will just need to include what would be the VAT applicable amount. The Government have introduced the scheme in response to large quantities of building companies entering administration owing large sums to the “VAT man”.

Will I still have to pay VAT to my suppliers for materials?

Yes, I am afraid so. There is no way for the merchants to determine what the materials will be used for or what rate of VAT would be applicable, much the same as for projects that are zero VAT rated for new build housing for example.

How do I get my VAT back?

You will need to do VAT returns to HMRC for the VAT rebates as before, just now there will be no collection element.

But Jack, wont this affect my Cash Flow?

Yes, unfortunately it will. The Governments objective is an honest one, suggesting that firms shouldn’t be operating with their VAT money as working capital, however, it is somewhat naïve to the cash flow crisis in the industry. The best way to minimise the risk to your cashflow is to increase the frequency of VAT returns to monthly.

Do I have to do this for every project?

No, this only applies in certain situations. For domestic projects you should charge VAT as normal, when working for the end user, charge VAT as normal. Reverse charge applies when both you and your client are VAT registered and CIS registered. Projects that are zero rated typically will not be affected by this.

Is this a very complicated subject and should I seek the advice of my specialist accountant?

Yes, definitely. I am just a Quantity Surveyor straying out of his lane to try and help.

What is the likelihood of this being abandoned or delayed by the Government?

The Government will not let this go now, they have lost too much to insolvent companies that have collected VAT and spent it! There is a possibility of it being delayed, it has already been delayed once back in October and there is mounting pressure on the Chancellor to not compromise the construction COVID recovery and delay further. I am in favour of a delay, it will allow companies to capitalise ready for the change, I am not expecting this scheme to be cancelled entirely.

If you are confused about the reverse VAT scheme and want to discuss it further, maybe you think a Zoom call might help, let me know, if enough people want to discuss it, we can look to involve an accountant to present during the call. I have produced a handy flow chart to help with reverse charge VAT, find it on the Downloads page. Any questions, drop me an email.