Now you can reverse and still move forward
From March 1 most suppliers of building and construction services will need to go into a different gear, when the VAT Reverse Charge must be used when invoicing. It is designed to combat VAT fraud in the sector by moving the VAT charge further down the supply chain and paying it directly to HMRC. This aside, importantly, it will have a significant impact on how construction businesses account for VAT and manage cash flow moving forward.
The liability to pay tax will now be on the recipient, instead of on the supplier. So, if your business is the recipient of construction services and receives an invoice with the Reverse Charge applied, then you will account for the VAT amount as part of your overall tax, as if you've charged it to yourself.
When applied, the recipient of the goods or services makes the declaration of both their purchase and the supplier's sale in their VAT return. In this way, the two entries cancel each other from a cash payment perspective in the same return.
For the purpose of tax, the Reverse Charge allows the purchase to be handled as though the buyer is also their own supplier. Although this is not actually the case. The benefit is that this allows the seller to more easily process the transaction.
There are exclusions if some services are supplied on their own. These will include the likes of manufacture of building or engineering components, the installation of seating, blinds and shutters and manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, for example.
However, if you are invoicing for mixed supplies that includes a VAT Reverse Charge element, you should apply the VAT Reverse Charge for the whole invoice.
As you'll deduce from this, the Reverse Charge might have to be stated in any contracts drawn-up and you will also need to ensure your accounting system is able to process Reverse Charge invoices, which could well differ from project to project.
Additionally, invoices should clearly indicate that the Reverse Charge applies using the correct terminology. For example, 'Reverse Charge: Customer to pay the VAT to HMRC' or 'Reverse Charge: VAT Act 1994 Section 55A applies'.
This could all have a significant impact on cash flow. Businesses need to prepare for the fact that payments will be received net of VAT. A failure to consider this could leave them struggling to pay suppliers, and in a worst-case scenario, facing business failure.
So now is the time to assess your cash flow management, so as to gain more certainty on your cash positions, as well as your processes for the future. Cash flow forecasting is one way that companies can prepare for the financial impact. Further, by ensuring that accounting systems are updated and ready to implement the change, by understanding the impact on their cash flow and ensuring that key sub-contractors and suppliers have done the same, businesses will be able to drive through the Reverse Charge smoothly.
GSM can help you in all aspects of applying the new rules, in cash flow forecasting, as well as advise you of the commercial implications for your business. To seek our professional guidance on how best to prepare, comply and better manage your cash, whatever the project, contact GSM today on 020 7935 3793