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Implementing Reverse Charge VAT
What is Reverse Charge VAT
Members need to prepare themselves for the upcoming reverse charge VAT – this is perhaps the biggest change to construction taxation since the launch of the CIS Scheme. The change will see VAT being paid between construction firms ‘reversed charged’ which will have consequences for your cashflow and accounting systems.
In simple terms it means that whilst VAT must still be accounted for at each stage in the supply chain, for construction work the cash will only be collected on the top contract, VAT will be shown but the money will be reverse charged (zeroed out on the invoice) and payments will therefore be net VAT on all invoices below this in the supply chain.
What will be the impact
Effectively twofold – admin to prepare and cashflow. We have provided a cashflow calculator below (note it is generic and needs to be adapted for your business as every is different, but gives an indication). We have been getting feedback from our members as to the extent of the problem, these are statements from members:
“We are a specialist fit-out business who works both for main contractors and directly for clients, in about an 60:40 ratio. Our turnover is roughly £6m. If we set aside the additional admin, which given the structure of our business is particularly complicated, we think the overall cash cost to the business will be around £150-£200k”.
“We’ve already done a detailed analysis and, all other things being equal, we are facing a £800k cash hit by the end of January 2020. Our funding model uses invoice discounting to finance day-to-day working capital, so by that time we effectively lose 4 months of “VAT cash”. To mitigate this, we are likely to move to monthly VAT reporting, which reduces the impact to around £680k. Our T/O is around £2m per month and we anticipate 50%-60% of this to be affected.”
Advising your supply chain
Reverse charge VAT will involve some decision making before an invoice is sent to a customer based on the nature of the work done and accounts departments will need to know whether the customer is VAT registered and whether the customer is CIS registered.
FIS is a member (on behalf of our members) of the Joint Taxation Committee (JTC) and they have created a flow chart, which is similar to what members will use daily after October 2019. Further advice from the JTC is available below.
Think about collecting your customers VAT registration numbers and CIS UTR now for projects that will run over into autumn 2019. If you do not have these details, it is worth getting an End-User Certificate to confirm VAT status an example is below. Keep an eye on this page as we expect more guidance to become available as we get closer and information is challenged.
Advice on End-User Certificates (FIS Members Only)
It is suggested a letter or email is sent to your VAT registered subcontractors to draw their attention to the coming changes and start them thinking and planning. The more firms that know and understand that there are changes ahead the better. This letter is not just for your subcontractors. Imagine your contractors sending it to you, many contractors will use it or their own form of words.
An example letter is available here. This letter should go to all VAT registered subcontractors who you pay for construction operations, whether paid gross or net being subcontractors whose Unique Tax Reference Number (UTR) you have verified.
What else needs to be done
Make sure to test your own cash flow, and consider whether you ought to ask to become a monthly repayment trader. There is a spreadsheet available to help you do this in the links below.
Becoming a Monthly Repayment Trader
Apart from the additional admin, cash flow is the biggest concern. Many companies will be paying out VAT on material and non-construction services, but will not be collecting it on their invoices, so you will be down by the VAT for a quarter. Worth talking to your accountant and you need to check that you will benefit, but effectively if you move to a situation where the VAT are going to be owing you money, you can consider moving to monthly returns.
To switch to monthly returns you can:
- Ring the HMRC helpline 0300 200 3700
- Apply online to change your registration details
- Fill in form VAT 484 and send it to the address on the form
At our recent workshop it was suggested by our expert advisor that it should be sufficient to advise HMRC that you will be reverting to Monthly VAT from the 1st October and then acting upon this.
The Chancellor has reaffirmed the Government’s commitment to Making Tax Digital and advised there would be a light touch approach to penalties in the first year, where business are doing their best to comply, but there will be no light touch for failure to pay.
FIS has been lobbying with a number of other influential organisations for a six month delay, however, at the present time we have not received any formal statement from the Minister.
Additional Useful Resources
Download the webinar slides – Reverse VAT webinar slides
The recording of the Webinar is available to FIS members. Click here to access the recording
Reverse VAT cash flow modelling tool (this handy spreadsheet helps you to check the cashflow impact on your business, a £15million contractor could be down in cash terms by over £450,000 for a limited time).
Build UK has produced A Practical Guide to Reverse VAT that can be downloaded here
A simplified introduction to Reverse Charge VAT and how it relates to the interiors sector was prepared by Haslers for the FIS in the May edition of the SpecFinish magazine (see Page 14-15)
Public guidance has now been released and is available here (updated 7th June 2019). We urge all members to download a copy and take the time to read it. Companies must not start reverse charging before the start date.
FIS is a member on your behalf of the Joint Taxation Committee and as part of this subscription has a specialist helpline available to members. To access the helpline call: 0121 707 0077
More from the Joint Taxation Committee here