VAT changes for the Construction Sector from 1st March

VAT changes for the Construction Sector from 1st March

Following numerous delays, the new VAT Domestic Reverse Charge will finally come into effect from Monday 1st March 2021. Impacting the construction sector primarily, these changes may impact how you invoice a job, your cash flow and your administrative role when it comes to VAT.

What is changing?

How VAT is invoiced for certain types of construction services will change. Under the new system, the sub-contractor will not charge VAT on their invoice to the contractor they are working for. They will, however, identify the rate and amount of VAT due and notify their customer of this. The sub-contractor will then only be paid the net value of the work completed (no VAT). This will reduce the gross value coming into your business and you will need to plan for this change.

Why is this VAT rule coming into place?

Initially announced in 2017, HMRC has introduced the new VAT Reverse Charge as a way to correctly account for any supplies made by sub-contractors following many fraudulent cases where businesses were not paying their VAT charges to HMRC.

Who will be affected by the changes?

The new “reverse charge” system of VAT accounting will affect sub-contractors supplying their services to other contractors in the construction sector.

If you are a sub-contractor supplying labour only and not responsible for overseeing the delivery of the construction project, you will be exempt from the VAT Domestic Reverse Charge. If however, you are responsible for the delivery of the construction project with your client, then then the VAT Domestic Reverse Charge will need to be applied.

How can we help?

This change will clearly have a detrimental impact on cash flow for any business impacted by the change in their supply chain. If you would like any further guidance on the new VAT change or help planning for your cash flow forecast enabling you to manage the change, please get in touch.