Contractors and subcontractors registered for VAT and the Construction Industry Scheme will need to use the VAT reverse charge process for building and construction services from 1 March 2021.
VAT registered subcontractors affected by this change will no longer add VAT to their invoices to contractors. Instead, the contractors’ accounting system will need to add the deemed VAT to their VAT return on behalf of subcontractors, and at the same time, deduct the same amount as input VAT on the same return. Please find below a copy of the letter we have sent to clients explaining the situation in more detail.
If you need help to set this up please call. This does sound complicated but most accounting software can cope with the entries required. Here is our help sheet to getting this set up on Xero.Download Now
Contractors will only pay their VAT registered subcontractors the VAT-free amount invoiced, and as the reverse charge adjustment increases both input and output VAT by the same amount there is no financial cost to either party but there are cash flow implications to consider.
This new process only applies to certain types of services provided by subcontractors.
Please check with us if you feel you are affected but are unsure what to do.
If you have bookkeeping software that can be adapted to deal with this change then once appropriate changes are made, processing subcontractors’ invoices should be no more difficult than before.