What is VAT?Value Added Tax (VAT) was born in 1973 and plays a large role in providing revenue for the government in the UK. It is a consumption tax that is added onto a product or service that increases in value at each stage of production or distribution.
What is VAT Reverse Charge?VAT reverse charge means that customers are able to charge themselves VAT and pay it directly to HM Revenue and Customs (HMRC) rather than the supplier sending them an invoice at a later date, which in return stops suppliers from avoiding paying HMRC, also known as missing trader fraud.
Who is Going To Be Affected?This VAT recharge will be enforced for businesses that provide services to other businesses which will then sell on to a consumer. It will not be implemented for businesses who are providing a service directly to the consumer.
Which Services Will be Affected by The Reverse Charge?HMRC has said that the new tax scheme will affect businesses that provide specified services which are reported under the construction industry scheme (CIS) and will only qualify for businesses or individuals registered for VAT in the UK. It will not apply if the service is rated zero for VAT. Third party recruitment businesses who supply workers and pay them to do a temporary job will not be affected by the reverse charge. According to HMRC, the following are the services that will be affected:
- “Decorating or painting the inside or the exterior surfaces of any building or structure
- Site clearance, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works, earth-moving
- Constructing, repairing, altering, demolishing, extending or dismantling buildings or structures, including offshore installation services
- Reservoirs, pipelines, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- Altering, repairing, extending, demolishing, constructing of any works forming, or planned to form, part of the land, including walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours”
What Services Will not be Affected by The Reverse VAT Charge?The following are the services that will not be affected by the reverse charge:
- “Drilling for, or extracting, oil or natural gas
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
- Making, installing and repairing art works such as murals, sculptures and other artistic items
- Signwriting and erecting, installing and repairing advertisements and signboards
- architectural or surveying work, or of building, engineering, interior or exterior decoration and landscape consultants
- Manufacturing components for lighting, air conditioning, ventilation, heating, power supply, drainage, sanitation, water supply or fire protection systems, or delivery any of these to site
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- Extracting minerals and tunnelling, boring or construction of underground works for this purpose”
How To PrepareWith the 1st of March looming in the distance, it is important that you are prepared for the VAT reverse charge to enable continuous smooth running of your business’s cash flow and operations. You can prepare by:
- Investigating if the reverse charge will affect your sales or purchases
- Updating all your construction accounting software so it is current
- Analysing if the reverse charge will impact your cash flow
- Briefing employees who are liable for the VAT accounting operations so that they have knowledge on the reverse charge and the effects it may have.
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