Spring brings VAT changes for the construction sector and making tax digital

18 February 2021

At the time of writing, and despite the significant challenges arising from the UK’s withdrawal from the European Union and the coronavirus pandemic, HMRC is preparing for two significant VAT changes this spring. This article serves as a reminder for taxpayers that are naturally focused on other matters to consider these changes carefully.

Firstly, for the construction industry (and any taxpayer buying construction services) the significant cashflow cost arising from the introduction of the domestic reverse charge should not be underestimated. Secondly, many VAT registered organisations have incurred significant costs to adapt to the making tax digital (MTD) requirements. However, the most technically complex of these requirements – the requirement for digital links – only becomes obligatory for VAT returns for periods beginning on or after 1 April this year.

VAT domestic reverse charge: who, why and what?

Who is affected?

Any VAT registered organisation buying or selling construction services that fall within the construction industry scheme (CIS), even if the services form only a small part of the total value of the supply.

Why is the Government pressing ahead?

It has been estimated that the Exchequer loses £100m per annum from fraudsters that charge VAT on construction services provided but do not pass that VAT on to HMRC. These changes are designed to end this fraud.

What are the changes?

If your business provides CIS services, subject to VAT at the standard or reduced rate, to a VAT registered customer that has not certified that they are the end-user, they must not be charged VAT from 1 March 2021. Instead, sales invoices must include a legend explaining that the domestic reverse charge applies and stating how much VAT is due.

The impact of the changes to invoice templates and processing affected invoices should not be underestimated. However, it is the cashflow impact on affected suppliers, that in the past have collected VAT on their supplies, sometimes several months before it is due to be paid over to HMRC, that suppliers must be particularly careful about.

It's important to note that this change has been delayed by HMRC twice before and it's possible that further delays will occur. However, our advice is that affected taxpayers should not rely on there being a further delay. 

Making tax digital, digital links: who, why and what?

Who is affected?

Any UK VAT registered organisation that is obliged to account for VAT using the MTD regime.

Why is the Government pressing ahead?

Careless errors bought about by human error are thought to cost the Exchequer £8.6bn per annum. The requirement to introduce MTD more widely, and digital links in particular, is designed to reduce these errors.

What are the changes?

For VAT returns for periods beginning on or after 1 April 2021, affected organisations are required to establish digital links which automate the transfer of data from the relevant digital accounting software records (of sales and purchase data) to the software which submits the VAT return information to HMRC.

For more information please get in touch with Phil Munn.

Domestic reverse charge

Now that the introduction of the domestic reverse charge for construction services (the DRC) has been delayed until 1 March 2021, it would be very tempting to similarly delay your preparations. But the DRC could require you to make changes that will take some time to implement and acting now will help you avoid unwelcome surprises in April 2021.

Find out more