Client alerts: Dealing with tax changes

Construction VAT alert

Your contractor clients need to abide by the new Domestic Reverse Charge (DRC) rules from 1 October 2020.

Our alerts, one for sub-contractors and one for main contractors, set out the minimum work that needs to be done before 1 October 2020, and suggests that affected clients contact you to do the necessary.

If your contractors were diligent, and made the changes before the original 1 October 2019 deadline, you will need to “unstitch” the changes with them and moth-ball the process until 1 October 2020.

Reverse Charge, what is all the fuss about?

On the face of it, there does not seem to be much to make a fuss about; just adapt the VAT codes in the contractor’s accounts software to direct the DRC output tax into the required box on the VAT return, and simultaneously, add the same amount to the input tax numbers. Job done. But it that the end of the story?

As the contractor is paying his sub-contractors’ VAT they will be paying less to the subbie and more to HMRC, so from a cash flow point of view, there may be timing differences – and possible cash-flow hiccups – but taking the long view surely these will even out?

The downside risks for contractors

HMRC have dedicated a page to explaining – in detail – how the domestic reverse charge will be applied to CIS contractors. Obviously, it will only affect  firms who are registered for VAT, whether they be contractors or sub-contractors, but the notes reveal a number of issues that are potential bear-traps for the unwary.

To save you time, we have created a Word copy of the page for reference and a PDF copy of a useful, HMRC flow-chart that illustrates when DRC applies and when it does not.

As you are probably aware, if the DRC applies to a transaction this has to be accounted for outside the Cash Accounting or Flat Rate Scheme. This fact alone could create havoc with most bookkeeping software.

Planning will be necessary to gauge the cash-flow impact of the DRC. For example, a sub-contractor that invoices most of his work to CIS contractors will suddenly find that they are due VAT refunds each quarter. Perhaps monthly VAT returns would be appropriate? There are also the impacts on traders that use the Cash Accounting or Flat Rate Scheme.

Contractors will need to inform their sub-contractors if the work undertaken comes within the DRC charge. Accordingly, they will need know what is a DRC supply and what is not.

Why invest in the Landmark alerts?

There is no doubt that affected clients need to be aware of the various challenges that the change to DRC accounting will create. Bob Edwards has written the alerts in an easy to read format that point out the minimum tasks that need to be dealt with before the 1 October 2020, deadline.

There are two documents: one to send to main contractors and the other to sub-contractors, and are updated to reflect the extended 1 October 2020 deadline.

The documents are in Word format and are supplied with no copyright restrictions; you are free to edit the material to suit your practice style. They are written so that you can send to clients “out of the tin”. You will just need to filter out your VAT registered contractors and send them (preferably by email) the appropriate document.

You could also add the content to your website and prompt site visitors to download a copy in exchange for their contact details.

Bob Edwards

Bob has been working with practices across the UK offering novel ways to improve cross-sales and increase new client acquisitions. He is also interested in "step changes" in legislation that offer challenges, and therefore opportunities, for practitioners to provide new recurring and one-off support services to clients.