We outlined the changes coming in under the VAT domestic reverse charge (DRC) on 11 June 2020 and updated you on 7 January 2021, but there are a few checks our construction industry clients should carry out now.Flat rate scheme
If our subcontractor building clients are still in the VAT flat rate scheme (FRS), they should consider leaving the scheme on 28 February and revert to normal VAT accounting. This can be done in the middle of a VAT period. Businesses can’t retrospectively withdraw from the FRS.
Once the business has left the FRS it can reclaim VAT on purchases such as materials and tools. This will probably put the business into a VAT repayment position if they are reverse charging VAT on most of their invoices to larger construction businesses.VAT periods
Where a building firm will turn from a VAT payer to a VAT reclaimer, due to the operation of the DRC, they should consider moving on to monthly VAT returns. This may mean extra administrative work, but the cash flow advantages should outweigh that.Cash flow
Smaller building firms will suffer a cash flow hit with the DRC, as they will no longer be collecting VAT on most of their sales, then hanging on to the VAT money for up to three months before paying it over to HMRC. You need to work closely with your builder clients to work out their cash position over the next few months.
The firm may need to apply for a government backed Bounce Back Loan from their bank, but be quick because this scheme is due to close on 31 March 2021, unless it is extended in the Budget next week. Under the Bounce Back Loan scheme, no repayments or interest are due from the borrower in the first 12 months of the loan term.Written by the Tax Advice Network