Reverse VAT Charge in Construction Explanation and Summary

What is Reverse VAT Charge in Construction?

Reverse VAT charge is the new way in which HMRC will collect VAT from CIS registered individuals or businesses in the construction and building industry. It will come into effect on the new date of 1st March 2021.

After that date the way building and construction services are invoiced will change. In simple terms, it means the main contractor will pay any VAT due straight to HMRC, rather than to the subcontractors that they use, who often rely on that money themselves for cashflow throughout the year. ​

Which businesses will the Reverse VAT Charge apply to in the Construction Industry?

The construction and building services that Reverse VAT charge will affect are construction, alteration, repair, demolition, installation of heat, light, water and power systems, as well as drainage, painting, decorating, scaffolding, civil engineering, site clearance, excavation and foundation works. It also applies to building supplies. 

Which businesses will the Reverse VAT Charge not apply to in the Construction Industry?

Not all businesses in the construction industry will be affected by reverse charge VAT. The excluded businesses include architect services, surveying, consulting, engineering, interior/exterior design, drilling, manufacturing of building equipment and materials, manufacturing of components, sign writing and installation of seating, blinds, shutters or security systems. 

The 4 things that you really need to do next

To be ready for Reverse Charge VAT before 1st March 2021, HMRC suggest contractors and sub-contractors should do all of the following:

1. Check to see if reverse charge applies to your business

2. Consider if it will have a bad impact on your cashflow 

3. Make sure your accounting staff know about the change

​4. Make sure your accounting software can do Reverse Charge VAT

How we can help you get prepared with Pegasus CIS software

At o-a-sys we specialise in providing small to medium businesses in the construction industry with a software solution called Pegasus CIS. The current version of which is fully updated to handle Reverse VAT Charge.

That means the newest version of the software automatically calculates, registers and reports reverse charge VAT for HRMC compliant invoicing and reporting. This essentially gives you all the tools that you need to be prepared for March 1st whether you are a contractor or a sub-contractor.