TT297: All change for Contractors under CIS - Update

Published 11 September 2019 by Barnes Roffe LLP

The new rules relating to VAT for the building and construction sector are now due to start from 1 October 2020.

A brief overview of the new rules:

From 1 October 2020, subcontractors on most CIS work will no longer charge VAT within the supply chain.  The VAT will only be charged by the main contractor to the end-user.  Subcontractors will, however, still be able to reclaim VAT on materials and other expenses, but any VAT registered subcontractor should not be charging VAT to a contractor further up the chain.

There are some specifically stated excluded services and also the new rules are known as the “reverse charge”, will not apply if the service is zero-rated for VAT or if the contractor is not registered for VAT in the UK.

If any services in supply are subject to the reverse charge, all other services in that supply will also be subject to the reverse charge.  This is the case even if a particular service would be excluded from the reverse charge if it were being supplied as a single service.

If your customers are a mix of end-users and main contractors, then each supply will be considered separately.  If the supply is for the main contractor or part of a bigger chain leading to the main contractor, then the supply will be subject to the reverse charge.  If the supply is direct to an end-user, then you will charge VAT on your invoice.  In both cases, any VAT registered subcontractors working for you will be subject to the reverse charge and will not be charging you VAT for their services.

Important issues to consider:

Subcontractors will no longer be receiving VAT on some of their sales and this may lead to a funding gap shortly after implementation of the system.  Many businesses may find that they have become repayment traders, where they have a net claim from HRMC instead of a net payment.  Repayment traders can apply to HMRC to have monthly VAT returns in order to speed up the receipt of repayment and aid cash-flow.

Companies that are supplying construction workers are likely to fall outside of the reverse charge regime, as they are making a supply of staff for VAT purposes.  But, you will need to carefully consider whether any construction services are being provided.

HMRC have announced that they will be applying a “light touch” for the first 6 months of the new legislation, as long as you are trying to comply with the new rules and are acting in good faith.

Speak to the experts at Barnes Roffe. We can model your cash flows to see what effect the new rules will have on your business, whether there is a business case to move to monthly VAT returns and at what point the change should be made for maximum cash efficiency.