Guide to UK Construction VAT Rules

Your Guide to UK Construction VAT Rule Changes

Prepare for the upcoming Domestic Reverse Charges for VAT on construction services from 1st March 2021.

March 2021 is set to bring construction industry changes in VAT you need to be aware of. We’ve put together a downloadable guide below to help you prepare.

In this guide we look at the ‘Domestic Reverse charge‘ (DRC) that is to be introduced for VAT on construction services, from 1 March 2021. This was announced in a consultation in early 2018, with the intention that it should be introduced on October 2019. It was delayed for a year because of Brexit, then delayed another 5 months because of the pandemic.

As far as we can tell, Brexit and the pandemic will still be with us on 1 March 2021, but we have to be prepared for the new rules to be introduced without a third delay. There are links to HMRC detailed guidance within this guide.

What’s it all about?

HMRC has lost a great deal of money over the last 20 years to ‘missing trader fraud’. Someone charges VAT to a customer, receives payment, and disappears without paying anything to HMRC; the customer then claims the VAT back as input tax from HMRC, who may pay out the claim before they realise they have not collected the money from the supplier. Some frauds involve international transactions, but there has been an increasing problem in the UK construction industry (as well as other sectors).

To deal with this, the normal rules of VAT are being set aside. VAT is normally based on the principle that the final consumer bears the cost of the tax, but it is collected by everyone who has contributed in the supply chain.

The benefit to the government of charging VAT at every stage is that it makes the tax hard to avoid: all traders have to charge it on all transactions. However, it gives ‘W’ an excuse to charge £1,200 for something that is only worth £1,000; ‘X’ may pay the gross amount in good faith, believing that the cost will only be £1,000, and then end up arguing with HMRC if ‘W’ has disappeared with the £200.

How does this help?

A ‘reverse charge’ system means the supplier doesn’t add output tax to a sales invoice. Instead, the customer reports tax in Box 1 of their VAT return and claims it back in Box 4. Only the last stage in the chain is charged to VAT in
the normal way.

Download VAT Changes Guide (PDF, 2Mb)

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