Reverse Charge VAT and Cash Flow
The VAT domestic reverse charge (DRC), which drastically alters the way VAT is accounted for in construction, will be applied as of 01 March 2021. Its purpose is to tackle fraud by stopping VAT changing hands throughout most of the construction supply chain. It is reported that VAT fraud, within construction alone, currently costs the Treasury £100m in lost tax revenues each year.
Businesses affected by these changes, which will include some of your clients, may need to adapt accounting software and processes plus increase VAT compliance.
There are, however, some specific exclusions to the reverse charge policy:
Your supply is to the end-user or an intermediary connected with the end-user
You are an employment business that makes supplies of staff and are responsible for paying the temporary workers you supply
You supply zero rated construction services
Your client is not VAT registered in the UK
Upon seeking guidance, our advisors shared that HMRC states “employment businesses supplying construction workers are not likely to be considered as a building and construction service for VAT purposes”. Your requirement, as an employment business (agency), is to source construction workers to enable you to fulfil contractual obligations to your clients who in turn supply the construction service.
As our business relationship with you is for the supply of labour and intermediary services, our advisors have confirmed that our invoices to you will not be subject to the reverse charge.
In our opinion, based on HMRC guidelines, if your terms of business with your clients is for the provision of labour and not construction services, your supply will also NOT be subject to DRC. Therefore, there should be no change to the way you account for VAT post March 2021.
Stonebridge does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before making any decisions.