Reverse VAT for the construction industry

Monday February 8, 2021

Who’s affected and who isn’t?

If you are VAT registered and working under the CIS scheme then you need to check whether you are affected or not.

  • If you are not both, then you will not be affected.
  • If you are the main contractor then the usual VAT rules should apply, if you are a sub-contractor and registered for both CIS and VAT then you will be subject to this rule.
  • You could also be a sub-contractor on some jobs and the main contractor on others, this will mean that you will be subject to different VAT rules depending on who you are working for.

If you’re not sure whether what you do qualifies for the DRC, talk to RIFT Accounting to find out exactly where you stand.

As always, you’ve got to keep your cash flow situation in mind. If you are used to factoring your customers’ VAT payments into your day-to-day finances, suddenly having them cut off could be a real problem. Choked off cash flow is a killer, so anything that clogs the financial arteries of your business could easily leave it bleeding out.

What’s it all about and why is it happening?

Long story short, this is a big shake-up in the way contractors and subcontractors handle VAT in the building game. From 01 March 2021, subbies won’t be charging VAT to the contractors they’re working for. Instead, the contractor will be stuck reporting the input VAT (what they’ve bought) and the output VAT (your sale) in their own VAT returns. With time running out before the new system comes into force, things are starting to build to a nice little frenzy. Contractors and businesses are realising that they’re going to find themselves classified differently across different jobs. Naturally, this is causing a few confused headaches.

As for why the new scheme’s needed at all, it all comes down to the same song HMRC’s been banging out for ages in construction: clamping down on fraud. The taxman’s got his mind set on chasing down the estimated £100 million he believes he’s losing every year to the “missing trader” scam.

What’s the missing trader scam?

So, under the old rules, a customer would pay VAT on the labour, materials and services they bought. That cash would go first to the subcontractor, then to HMRC through the subbie’s VAT returns. With missing trader fraud, the subcontractor basically just disappears with the cash, likely popping up later with a different trading name or business set-up. HMRC’s tried a few ways of stopping this kind of scam from happening, with no real success.

What do I need to watch out for?

Assuming you’re affected by the DRC one way or another, there are a couple of points to be aware of. For one thing, the scheme’s not trying to screw extra money out of anyone who’s already playing by the rules. If you’re a subcontractor, you’d have been passing that VAT cash to HMRC anyway. Now it’ll just get done by your customers instead. If you’re a contractor, you’d have been paying the money anyway, only now it’ll go directly from your pocket to the taxman’s. However, you might still get tripped up in a couple of ways. For instance, your subbie might still try to charge you VAT in their invoice, whether as an honest mistake or otherwise. If you’re an end user and haven’t declared that properly, HMRC might try to stick you with the charge anyway. You might not even realise that the scheme affects you until it’s too late – or think it does apply when it doesn’t.

How can RIFT Accounting help?

The best thing about having RIFT Accounting on your team is that we don’t just blunder in once a year to sort out your tax returns. We’re there for you day-to-day throughout the year to keep your business safe and thriving. If you’ve got questions, we’ll answer them. If you’ve got problems, we’ll solve them. At the same time, we’ll be keeping you in the taxman’s good books with our years’ of expertise. HMRC is a maze of constantly shifting rules and thresholds, but we’re always up to date and ready to help. Get in touch if you have any questions.

Contact Us

Newsletter Sign Up

Fieldset legend