The new VAT Reverse Charge Scheme comes into effect on the 1st March 2021.
Where it applies the effect of the scheme is to take VAT payments out of the transaction so the provider of the goods or services cannot disappear or fail to pay the VAT due.
Instead, the purchaser of the goods or services within the CIS supply chain accounts for the VAT (output tax) due to HMRC rather than the provider of the goods or services. The purchaser does this by declaring the VAT due as output tax on its VAT return. This can also be reclaimed as input tax subject to the normal rules – for most transactions the VAT is simply netted off.
The new VAT Reverse Charge Scheme classifies EEBS as a “Labour Provider” and we are not therefore affected by the new regulations. There will be no change to how VAT is invoiced, paid or recorded on these purchases. Other suppliers within the normal CIS supply chain are subject to the new rules.
NOTE 1 Your accounting software should be able to accommodate the new rules, and should help you manage invoices and VAT returns in compliance with the new regulations. You will need to check with your supplier as to exactly what needs to be done.
NOTE 2 When supplying services that are subject to the VAT Reverse Charge Scheme the invoice must clearly state that the “VAT Reverse Charge Scheme applies”, and at what rate the supply would have been made.
NOTE 3 If you are an end user you must provide your CIS suppliers with a statement that confirms:
“We are an end user for the purposes of section 55A VAT Act 1994 Reverse Charge for Building and Construction Services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the Reverse Charge.”
So, for reference;
- For your clients that are end users: No change – you charge VAT on your invoice and receive it from the client as normal. You record the output tax in box 1 of the VAT return, and the net value of the sale in box 6.
- For your clients who are CIS contractors to whom the Reverse Charge applies: You identify on the invoice that the Reverse Charge applies to VAT, so they do not pay it, and neither do you record it as output tax in box 1 of the VAT return. You record the value of the transaction in box 6 as normal.
- For the CIS Sub-contractors that are supplied through EEBS: No change – you pay the VAT on our invoice to us. You reclaim the VAT from our invoice as normal input tax in box 4 of the VAT return, and the nett value of the purchase in box 7.
- For sub-contractors who you engage directly and who are subject to the scheme: You receive an invoice from them that shows that the Reverse Charge has been applied, and at what rate the supply was made. (20% or 5%). You record the VAT element that would have been due on the invoice as output tax in box 1. You also reclaim this amount as input tax in box 4 as normal, as well as recording the net amount of the purchase in box 7 of the return. You must not duplicate the value of the purchase as a sale in box 6!
If your cashflow is damaged by the new scheme you can now move to monthly reporting, to ease the impact of the scheme on your business.
Still confused? Contact the EEBS team for help and advice, email@example.com.