Wise Up Wednesday: VAT Rule Changes For Subcontractors
VAT Rule Change For Subcontractors
Exclusively For Specialist Contractors
VAT rule changes for subcontractors.
The VAT rule changes have NOT repeat NOT gone away!
The VAT changes will hit your cash flow!
You need to be ready.
How Time Flies
It’s a year since the VAT rule changes were postponed for a further 12 months, and they have been postponed until 1 March 2021.
The changes which define the treatment of VAT during specific business-to-business service supplies, was originally due to launch on 1 October 2019 but was delayed by one year to 1 October 2020, before it was further delayed by another five months to 1 March 2021 due to the impact of coronavirus.
HMRC was due to change the way it collects VAT from construction organisations and the new regime could easily have pushed small and medium-sized subcontractors into a cashflow crisis!
Note that this is only a postponement and not a reversal of the policy!
Given the amount of time that has elapsed HMRC will no doubt say that the industry has had more than enough time to prepare. Therefore, you should prepare to make the change and can still use the extra time wisely.
Under normal circumstances, a subcontractor will charge the main contractor for work carried out, adding 20% VAT (nil rate or 5% applies in certain projects).
Every quarter, the subcontractor declares the VAT, paying it back to HMRC. So far, so straightforward.
Under the new reverse charge VAT system from 1 March 2021, VAT cash will no longer flow between all businesses. With each business transaction, the VAT will be calculated as a paper exercise and registered on the invoice as a ‘reverse charge’.
Only client-facing organisations at the top of the construction supply chain (Main Contractors on all major projects) will be required to pay the tax.
As a general rule of thumb, any company that is registered with the Construction Industry Scheme (CIS) will fall into the reverse charge category. Any company that is invoicing a client that is not CIS-registered must charge VAT.
How Will This affect You?
This has several major implications for you and your cash flow:
- You will still be paying VAT to your suppliers, labour agencies and some subcontractors but NOT collecting it from the Contractor.
- Your cash flow will be hit until the end of each VAT accounting period.
- You will no longer be able to rely on VAT money for cashflow.
- The onus will fall on major Contractors to pay very large sums of money to the exchequer.
- The whole of industry will need to get to grips with a new accounting system, or risk fines.
- The potential for confusion and manipulation is enormous.
So What Can You Do About It?
It’s clear from the “postponements” (rather than changes in policy), that we can’t stop it from happening!
So, the best thing every Specialist Contractor, Trade Contractor and Subcontractor can do is to ensure that they are fully conversant with the new regime, and to plan for any cash-flow shortfall that it is undoubtedly going to create.
Take a look at: VAT Reverse Charge For Specialist Contractors
And remember that if you need any help to resolve any kind of payment problem, including how to deal with the VAT rule changes for subcontractors, please don’t hesitate to pick up the phone, take action and give our friendly team a call on 01773 712116.