Category: VAT Registration

The delayed start date for the domestic reverse VAT charge has given businesses an extra year to prepare for the charge. We explain what you can do to prepare.

Domestic reverse VAT charge for building and construction services

The domestic reverse VAT charge for building and construction services was due to come into effect from 1 October 2019. However, in early September it was announced that the start date had been put back one year. As a result, the charge will now apply from 1 October 2020.

Who is affected?

The charge will affect individuals and businesses who are registered for VAT in the UK and who supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

Nature of a reverse charge

The reverse charge means that the customer receiving the specified supply has to pay the VAT rather than the supplier. In turn, the customer can recover the VAT under the normal VAT recovery rules.

Supplies within the scope of the charge

The reverse charge will apply to supplies of building and construction services which are supplied at the standard or reduced rates that also need to be reported under the CIS. These are called specified supplies.

However, where materials are included within a service, the reverse charge applies to the whole amount. By contrast, where deductions are made from payments to subcontractors under the CIS, no deductions are made from any part of the payment that relates to material.

Move to monthly returns

The introduction of the reverse charge will mean that some businesses may become repayment traders claiming VAT back from HMRC rather than paying it over to HMRC. To aid cashflow and reduce the delay in claiming the VAT back, repayment traders can move to monthly returns.

Planning ahead

The delayed start date has given businesses an extra year to prepare for the charge. In order to be ready for its introduction, businesses within the CIS should:

  • check whether the reverse charge will affect their sales, their purchases or both
  • update their accounting systems and software to deal with the reverse charge from 1 October 2020
  • consider whether the change will impact on cashflow
  • ensure that staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

Contractors should review their contracts with subcontractors to determine whether the reverse charge will apply to services received under the contract. Where it does, they will need to notify their suppliers.

Subcontractors will need to contact their customers to obtain confirmation from them as to whether the reverse charge will apply, and also whether the customer is an end user or intermediary supplier.

Impact of change of start date

HMRC recognise that the start date was changed at short notice and that businesses may have changed their invoices to meet the needs of the reverse charge and cannot easily change them back. Where errors arise as a result, HMRC will take the change of date into account.

Partner Note: The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019 (SI 2019/892); The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) (Change of Commencement Day) Order 2019 (Si 2019/1240).

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Even if your business hasn’t reached the £85,000 turnover threshold, there are some benefits to registering for VAT early.

VAT registration – sooner or later?

Once a business is up and running, the next major administrative area to be faced often concerns the subject of VAT. At first glance, it looks complicated – not to mention time-consuming – particularly for small businesses. However, taken one step at a time, the rules governing VAT registration and invoicing are generally quite straight-forward and relatively easy to navigate.

The law states that all traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once their taxable turnover reaches a pre-set annual threshold, which is currently £85,000. Broadly, a business must register for VAT if:

  • its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies), have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or
  • there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or
  • the business takes over another business as a going concern, to which the two bullet points above apply.

A business can register for VAT voluntarily if its turnover is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

Example

Sandra is a non-VAT registered carpenter and a basic rate taxpayer. She buys a new saw to use in her business, which cost £100 plus VAT, so she pays a total of £120 (£100 plus VAT at 20%), which can be set against her business profits for income tax purposes. As Sandra is a basic rate (20%) taxpayer, she will save tax of £24 (20% of £120), so the saw actually costs her £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the saw actually costs him £80 – saving £16 by being registered for VAT.

Is non-registration preferable?

VAT-registered businesses supplying goods and services to private individuals often feel dis-advantaged compared with their non-registered counterparts because they have to charge an additional 20% on every bill issued.

A trader who does not want to have to register for VAT, may be able to stay below the annual VAT registration threshold by supplying labour-only services and getting customers to buy any goods needed themselves.

Example

Bob is a non-VAT registered plumber, but his turnover is creeping up towards the VAT registration threshold. He could ask his customers to buy materials for a job directly from a DIY shop. Although the customers will have to pay the VAT on these items, they won’t have to pay VAT on Bob’s invoice for labour services. This will also have the additional advantage of reducing Bob’s annual turnover for VAT registration purposes.

Registration benefits

Deciding whether to register for VAT voluntarily before the registration threshold is reached is a big decision that can have lasting implications for the financial health of the business. It is vital therefore, that the matter is given careful consideration. There are several positive reasons supporting voluntary registration, including:

  • Reclaiming VAT – although a registered business will have to charge VAT on goods and services (known as charging ‘output tax’), it will also be able to reclaim VAT that it is charged by other businesses (known as ‘input tax’). Where input tax exceeds output tax in a given period, the business will generally be able to reclaim the difference from HMRC.
  • Marketplace perceptions – some businesses choose to register for VAT in order to appear larger than they are. Customers are likely to be aware of the £85,000 registration threshold and where a business is not registered, its customers will know that the business turnover is lower than this. A business may therefore consider registration as a way of increasing its standing amongst competitors, and in the eyes of clients.

Partner note: VATA 1994, Sch 1; HMRC VAT Notice 700/1

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Do you run a business? Should you register for VAT? What are the conditions? We answer all these questions here

All traders – whether sole traders, partnerships, or limited companies – are obliged to register to charge and pay VAT once annual sales reach a pre-set annual threshold. This threshold remains at £85,000 for the year commencing 1 April 2019.

The annual VAT threshold is determined by total sales and is not the same as total profits (which is generally sales minus expenses). A business can make a loss and still need to register for VAT!

In summary, a business must register if:

  • its taxable outputs, including zero-rates sales (but not exempt, non-business, or ‘outside the scope’ supplies),have exceeded the registration threshold in the previous 12 calendar months – unless the business can satisfy HMRC that its taxable supplies in the next 12 months will not exceed a figure £2,000 below the registration threshold (so currently £83,000); or
  • there are reasonable grounds for believing that the business’s taxable outputs in the next 30 days will exceed the registration threshold; or
  • the business takes over another business as a going concern, to which the two bullet points above apply.

The threshold operates on a month-by-month basis, so a check should be made at the end of each month to make sure the business hasn’t gone over the limit in the previous twelve months.

The month-by-month basis also works by looking forward, so it is equally important at the end of each month to consider whether the limit will be exceeded in the following twelve months. If it is anticipated that total sales may exceed the VAT threshold, the business needs to register.

Where registration is required, HMRC must be notified:

  • within 30 days of the end of the relevant month (past sales condition); or
  • by the end of the 30-day period (expected sales condition).

If the business does not register with HMRC within the specified time limit, a penalty will be charged, which can eventually be up to 15% of the VAT owed – in addition to the actual VAT due.

Voluntarily registration

A business can register for VAT even if its turnover (total sales) is below the threshold and it may actually save tax by doing so, particularly if its main clients or customers are organisations that can reclaim VAT themselves.

Example

A non-VAT registered sole-trader buys a new office photocopier for the business. The copier costs £100 plus VAT, so a total of £120 is paid (£100 plus VAT at 20%). £120 is set against business profits for income tax purposes. If the trader is a basic rate (20%) taxpayer, there will be a tax saving of £24 (20% of £120), so the copier actually costs the trader £96. However, if the business is VAT-registered, the £20 VAT paid on the item (the input tax) can be reclaimed and £100 is set against business profits for income tax. The tax reduction is therefore £20 (20% of £100) and the copier costs the business just £80 – £16 is saved by being registered for VAT.

The business must not charge or show VAT on its invoices until the VAT number is received from HMRC. However, the VAT for this period must still be paid to HMRC. Therefore the business will need to increase its prices to allow for this and tell its customers why. Once the VAT number is received, the business can reissue the invoices showing the VAT separately.

Once registration has taken effect, there are a series of administrative obligations which must be complied with, and, importantly, a severe penalty regime exists for getting it wrong.

Partner Note: VATA 1994, Sch 1; HMRC VAT Notice 700/1

To find out more please follow us on Facebook , Twitter or Linkedin. Feel free to contact us on 0333 006 4847 or request a call back by texting to 075 6464 7474