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UK construction VAT reverse charge: potential cash flow consequences

The UK is introducing a new domestic VAT reverse charge process for the construction industry from 1 March 2021. The new regulations change the way contractors must manage VAT, under certain conditions. 

In terms of the new VAT reverse charge for building and construction services regulations, subcontractors will no longer account for VAT. Rather, when a contractor hires subcontractors, the contractor itself will account that VAT. 

When does the reverse charge apply? 

The new VAT reverse charge is an extension of the Construction Industry Scheme. The new VAT reverse charge only applies in cases of work performed under the CIS, between VAT-registered contractors and subcontractors.

The reverse charge does not apply to professional services, such as architects. Various categories of work are also excluded from the reverse charge. Notably, the reverse charge does not apply to end users, such as tenants and landlords.

What are the consequences of reverse VAT?

VAT reverse charge for construction services aims to reduce the possibility of fraud. The move aims to eliminate the possibility of a subcontractor charging VAT but then not paying that VAT to HMRC.

For contractors and subcontractors, the new measures require effective administrative processes to properly manage your invoices. Such businesses should ensure their invoicing and accounting technology is up-to-date.

There is also a potential cash flow issue. Subcontractors will no longer collect and hold VAT that would have been paid periodically to HMRC, potentially causing a cash-flow squeeze.

Industry voices have previously expressed concern that the VAT reverse charge mechanism could have adverse cash flow consequences around 150 000 construction firms.  

Optimise VAT compliance, enhance cash flow 

The UK construction industry is feeling the squeeze of Brexit, the pandemic and new VAT regulations. It is more important than ever to optimise VAT compliance to enhance cash flow and eliminate the possibility of penalties.

The Vatglobal VAT team will help you optimise VAT compliance and effectively leverage VAT regulations. Our proprietary cloud-based VAT technology ensures your compliance processes are always up-to-date. It’s an elegant solution that enables any business to easily adapt to new VAT regulations. 

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