A further reminder that new VAT rules for building contractors and sub-contractors will come into effect from 1 March 2021. The new rules were originally expected to commence from 1 October 2019, but an initial 12 month delay was announced. The start date was then delayed for a further 5 months until 1 March 2021 due to the impact of the coronavirus pandemic.
The new rules will make the supply of most construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.
This means that from 1 March 2021, sub-contractors will no longer add VAT to their supplies to most building customers, instead, contractors will be obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the Domestic Reverse Charge. However, there is no loss of cashflow as the deemed output VAT can be deducted as input VAT subject to any existing restrictions; in this way the two entries on VAT returns cancel each other out.
This change will mean you that contractors will have to alter the way that supplies from sub-contractors are treated by their accounting software.
HMRC’s guidance states that, for invoices issued for specified supplies that become liable to the reverse charge, the VAT treatment for invoices with a tax point:
- before 1 March 2021 – the normal VAT rules will apply, and VAT registered subcontractors should charge VAT at the appropriate rate on supplies
- on or after 1 March 2021 – the domestic reverse charge will apply.
