The VAT Reverse Charge for contractors operating within the construction industry was introduced earlier this month, having been delayed twice due to the pandemic and Brexit.

In essence, the liability for VAT has been pushed up the supply chain in an attempt to combat missing trader fraud in the construction sector, as was previously introduced for the sale of  computer chips and mobile phones. This applies only to small and medium-sized firms who pay standard and reduced-rate VAT services, registered for VAT in the UK and reported within the Construction Industry Scheme. 

Many sub-contractors in the construction industry purchase supplies and materials and charge the VAT to the main contractor. They would make use of the additional 20% revenue in their business until the end of the VAT quarter, when they would be required to pay the VAT on the materials.

Here’s how it used to work:

1. Sub-contractor carries out building work and charges the main contractor £100,000 for materials and supplies
2. They would invoice the main contractor for £100,000 + VAT = £120,000
3. The sub-contractor could make use of the additional £20,000 cash in their business for a three month period

Sub-contractors cannot benefit from the VAT cash in their business

Since the VAT Reverse Charge came into effect on 1 March 2021, the main contractor is now liable to pay the VAT on the cost of the materials, so the sub-contractor will not have the benefit of this cash in their business.

If you are a sub-contractor within the construction industry, you might need to make some adjustments to your cashflow to account for the VAT Reverse charge for contractors.

TVAF has a number of options available to help you to get ‘cash-flow fit’ if the VAT Reverse Charge means you will need some additional working capital in your business:

• An unsecured Business Loan could give your business a much needed cash injection
• Invoice Finance could help you to free up some capital that’s tied up in invoices owed to you
• A VAT loan could help you to spread the cost of your own VAT liability over three, equal monthly installments.

Please get in touch with our team if the VAT Reverse Charge for building and construction is likely to impact your cashflow – call 01635 785 400 or contact us.

If you need more detailed information about the VAT Reverse Charge for building and construction services here.