Construction Industry VAT Reverse Charge – REMINDER

After multiple delays, the new rules now apply from 1st March 2021
In order to counteract fraud in the industry, a new VAT reverse charge mechanism is being introduced so that the contractor rather than the sub-contractor accounts for VAT. The assumption is that contractors will be larger and more likely to be compliant and as a result, it is less likely that VAT will lost as a result of sub-contractors being paid VAT and then disappearing without paying it over to HMRC.

How will the reverse charge work?
Under the reverse charge system, the sub-contractor doesn’t charge VAT. Instead, the contractor in effect charges themselves the VAT that the sub-contractor would otherwise have charged. The input VAT that the contractor has charged themselves can then be recovered in the normal way on the contractor’s VAT return. When compared to the current system, this may actually provide the contractor with a small cash-flow benefit because under the normal rules they will pay out the VAT to the sub-contractor and have to wait to recover it from HMRC, whereas under the reverse charge mechanism that VAT won’t actually need to be paid out (because the VAT charge and recovery should cancel one another out on the return).

For full information download our factsheet here or call our tax team on 01628 770 770