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Introduction of reverse charging VAT legislation – Information for Subcontractors
The introduction of Domestic Reverse Charging legislation in the construction industry is due to come into effect very soon.
On 1st March 2021, the new Domestic Reverse Charging rules (DRC) will come into effect in the UK and will begin to affect payments made to subcontractors and their cashflows.
The Government website suggests that “there will be a negative impact on the cash-flows for many affected businesses,” as those affected will no longer get VAT payments from customers for services where the reverse charge applies.
So, it is important to understand the changes in order to plan for them.
What is Reverse Charging VAT?
HMRC indicate that this change to legislation will remove the scope for VAT fraud within the construction sector.
A Domestic Reverse Charge means that the UK customer who receives supplies of construction services must account for the VAT on those supplies on their VAT return, rather than the UK supplier.
In the majority of cases, subcontractors will stop receiving payment of VAT from their client/customer and will need to adjust their current invoicing and accounting procedures.
Who Does Reverse Charging VAT Affect?
This legislation will affect all businesses registered for VAT who are actively operating in the construction sector.
| The new reverse charge rules will apply to the majority of Novus subcontractor payments, as in most cases Novus will not be the end user.
Therefore, we have produced a free eBook to help provide information on the changes and the potential implications it may have. Click the image download it >> |
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What do Subcontractors Need to do?
As a first port-of-call, review the Government guidance outlined on the “Check when you must use the VAT reverse charge for building and construction services” and VAT reverse charge technical guide web pages on the UK Government website.
In addition to this, we advise:
- Talking to your Accountant/ Tax Advisor
- Reviewing your operating cashflow requirements from 1stMarch 2021
- Speaking to your software provider to ensure your invoice and application format is compliant
- Considering how to monitor whether your customers are VAT and CIS registered
- Obtaining confirmation from clients whether they are the end user under DRC rules
- Considering the suitability of monthly and quarterly VAT returns for your business
- Considering whether you would like to sign up to Novus’ MPL to receive more regular payments.
More information
For more information and/or assistance with Reverse Charging VAT, you can contact HRMC at indirecttax.vatsncfteam@hmrc.gov.uk.
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