How to prepare for the new VAT reverse charge system

Which businesses are affected?

Broadly speaking, if you operate in the construction industry then you’re likely to be impacted one way or the other.

The government website also provides a detailed list of services that would qualify for the new rules. It covers almost everything that would usually fall under the construction umbrella.

There are some exceptions, though. There is also a list of services for which reverse charge VAT does NOT apply, so check this before making any changes.

 

What’s the reason for the change?

The reason for this change is to crack down on tax fraud in the industry. The government wants to prevent businesses from charging their customers VAT and then keeping it themselves rather than paying it to HMRC.

In theory, the new change makes this impossible. Instead, the government collects the revenue from fewer businesses – the ones that interface directly with end users.

 

Is this a problem for my business?

Potentially, if you aren’t prepared.

Almost every contractor will be affected, especially if you pay other people for work which you bill on, or get paid by other contractors. If this is news to you, it’s time to take action, as you must be ready to comply immediately from 1^st March 2021 onwards.

The most important thing to consider is the negative effect on your cash flow. The VAT reverse charge will most likely reduce your incoming cash flow while your outgoings remain the same.

Why? Well, you’ll still be paying VAT when you buy from many of your suppliers. The VAT goes directly to HMRC, but you’re still paying it.

However, when other traders buy from you (if they aren’t end users), you won’t be able to charge that additional 20%. Overall you’ll have less gross payments coming in than you did before.

 

What can I do to prepare?

The best way to prepare for these changes is to communicate with your customers and figure out what exactly needs to be done in your specific case.

So how should you go about doing that? Here’s our advice:

 

1. Read the government’s official advice

We highly recommend scanning through the guidance published by HM Revenue & Customs for a better understanding. There are a lot of pointers there which are specific to different situations.

 

2. Talk to your accountant

You’ll also be able to get more personalised advice from whoever deals with your accounts. They should understand what the biggest impact will be on your business, given the way you work.

 

3. Consider how you handle your VAT returns

It’s common for contractors to do their VAT returns on a quarterly basis. If that’s what you do, consider changing to monthly. Although it might require more admin in the short term, this may help balance out the effect on your cash flow.

 

4. Update your invoicing system

You will need to review your invoices and potentially remove VAT from a lot of them moving forward. Make sure this is as systemised and automated as possible!

5. Write to your subcontractors

When your subcontractors invoice you for their services, they can no longer charge you VAT under the new rules, because you will owe it to HMRC directly instead. We suggest writing to them to confirm this, advise them on where to go for more information, and maybe offer to discuss further if needed.

 

In summary, there’s a lot to consider! But that doesn’t need to be a problem, as long as you’ve done your research and prepared for the incoming changes. For more tips and advice, keep following our posts on our website and social channels.