Have you wondered what VAT reverse charge is for your construction business?
Running a business can be challenging, and let’s be honest, VAT is one of the most confusing taxes.
The reverse charge was implemented in the construction industry recently, so follow this video or read below to find out everything you need to know.
Why Is The Reverse Charge Implemented?
The reverse charge scheme was implemented because massive fraud was going on within the industry; there were many different layers where people were charging VAT and not paying over. VAT fraud is a big business, and the government has installed this to tackle wasted money for our country.
Who Does Reverse Charge VAT Apply To?
This is highly going to be relevant for you if you’re a subcontractor. So, if you’re not directly dealing with the end client, and there’s a subcontractor above you, the reverse charge will be for you.
You need to be a VAT-registered construction business before you start. If you’re invoicing your contractors, in layman’s terms, you don’t have to charge VAT; on your accounting software, though it will charge VAT and add it backwards. You can set up this in your accounting system to do this for you, but in summary, you will treat this as not charging any VAT.
If You Are Dealing With The End-customer
One thing to bear in mind while in your business is that you may be dealing with the end customers too. So remember, when you’re invoicing the end customer for your construction job, this will have to include VAT in the same way. But when invoicing a contractor up the chain, there is no VAT.
Are There Any Benefits?
Now this can be either a blessing or a curse for you; as the construction owner, a lot of construction businesses can run quite close to the wire as cash flow is a bit tight. So, this additional VAT that they’ll collect and use for either a month or a quarter can aid their cash flow; this is beneficial.
But there’s also, on the other hand, some construction businesses, let’s be honest, they’re just not good with money. So, giving them that extra VAT in their pocket in the first place can be very tempting for them. So if you’re in that situation yourself, where you’re not the best at managing the money within your construction business, not having to collect VAT and pay it over can feel a godsend because there’s nothing better when you hit a vat quarter. And you’re continually getting refunds.
Because if you’re just doing contractual, only work, you’re not going to have any VAT that you collect, and all the VAT you are about to reclaim is from your costs. So this should trigger a guaranteed refund every single quarter.
But that’s provided you’re not working directly with end customers as well as this will change your overall VAT result.
What Qualifies For Reverse Charge?
If you’re a subcontractor, not everything will be under the reverse charge VAT; there are certain things that just do not qualify. So to name a couple, drilling is one, and architecture is another. So if you find yourself in a subcontracting chain, you still have to charge VAT a normal way if your service does not qualify.
If you want further advice on this, there’s a more comprehensive list that we’ve got if you need help; I can take on board any questions that you may have.
Who Needs To Use This Scheme?
As I mentioned before, you must be a VAT-registered business in the first place because if you’re not, you should not charge VAT.
But once you are VAT registered, you must be a subcontractor to use this scheme.
Make sure your invoices are dead clear with this. A lot of the bigger contractors who use subcontractors were clear with their subcontractors; they wrote to the companies in advance to say, “Look, we’re expecting this to be reversed charge; please sort your invoicing out”. Then you can either go on to your accounting software yourself, we use a package called Xero a lot, or you can get your accountant and advisor to change this for you. It should be a really easy process.
I know it looks a bit alien on the VAT returns, as you’re adding VAT and then taking it back, but this is just the way the system works.
Preparation Is The Key
If you’re new and find yourself in the reverse charge scheme for the first time planned for it, sit down and do a couple of test invoices on your accounting system and really get to understand it.
Make sure you’re also clear on your services because while many services do come under the reverse charge scheme, there are some that are not; HMRC has got all the guidance that this is quite easy to follow.
The reverse charge is important for invoices, but it’s also just as important for credit notes. If you are issuing credit notes, make sure the reverse charge is applied too.
Because you must apply everything consistently, if you’re not charging VAT and getting a reverse charge on your invoices, ensure this is consistent with the credit note. Otherwise, you could fall foul of making a mistake which could cost you a lot more extra VAT and penalties later down the line.
I hope you found this video of interest. But if you have any questions whatsoever, take this opportunity to book a free call with me. Simply click my Calendly link below, and I will take on board any questions without making you cringe with an awful sale pitch.
