VAT returns due to be submitted by 7th May for the March 2021 quarter will be very different for many businesses due to the impact of Brexit and the new domestic reverse charge rules for builders (DRC).
If you run a business in the construction sector or one that imports/exports goods to the EU, you will need to take extra care before pressing the ‘send’ button to fire off your next VAT return to HMRC. The figures may well be very different in many cases compared to the previous quarter. This is because we have both Brexit and the new domestic reverse charge (DRC) rules for the construction industry to deal with.
Extra time spent reviewing systems and checking VAT codes on accounting software will be a sound investment of resources to ensure that you do not make any errors. So here is my checklist:
1. Check there are zero entries in Boxes 2, 8 and 9
For a GB based business, Boxes 2, 8 and 9 of VAT returns will always have zero entries (see (3) below about Northern Ireland). These boxes were relevant up to 31st December 2020 because the UK was a member of the EU and they needed to be filled in as the VAT treatment of imports and exports to and from the EU was different to imports and exports from outside the EU.
However, since 1st January 2021, there is no longer any difference to the treatment of imports and exports whether they are from the EU or elsewhere in the world. You must, therefore, check these boxes are zero.
2. Deal with VAT correctly on imports
Imagine the following scenario: Eric trades as a DIY store and imports door handles from a supplier in France. What will be the VAT procedures for his March quarter? The starting point is that Eric or his agent would hopefully have elected for postponed VAT accounting (PVA) when the goods arrived from France and were declared as an import.
No VAT is payable at the border and it will be accounted for by Eric in Box 1 and Box 4 of his March return with a reverse charge entry based on the value of the goods, thus making the effect of VAT neutral. The net value of the import is recorded as an input in Box 7. Eric’s entries in Boxes 1 and 4 will be based on postponed import VAT statements downloaded from HMRC’s Customs Declaration Service (CDS).
3. Trading with Northern Ireland
Despite Northern Ireland being in the UK, it is still part of the EU’s single market as far as goods are concerned, so trading with NI is treated as before as though it is an EU member state, with entries in Boxes 2, 4, 7 and 9 for each transaction.
Sales of goods to VAT-registered customers in the EU will be recorded in both Box 6 and 8, the outputs box and the EU disposals box. But a business in Northern Ireland can also use PVA for non-EU imports, which should give their cash flow a boost.
4. DRC – code sales and purchase invoices correctly
The new DRC system for the construction industry finally started on 1st March 2021. The new rules affect both suppliers and customers of construction services, but as long as the coding of purchase and sales invoices is done correctly, this should ensure that the VAT return boxes are completed correctly.
Example: Pat the plumber has charged £500 for labour and £2,000 for materials on a ‘supply and fix’ job for Steve on 1st March 2021. The transaction is standard rated and subject to the DRC.
Pat will charge £2,500 and no VAT on the invoice issued to Steve, recording the sale in Box 6 of his next return (outputs box). Steve will account for the VAT not charged by John in both his output tax and input tax boxes 1 and 4 (£500) and include the net amount of £2,500 in Box 7, the inputs box.
5. VAT payments to HMRC may be significantly higher or lower than before
With the deadline date to pay any VAT due on the March return being 7th May, the impact on the net amount of VAT payable or repayable in Box 5 because of DRC, could be significant:
- Suppliers: For a builder selling DRC services, there will be less output tax to declare, meaning either lower payments to HMRC or even repayments. If significant repayments start to become the norm, it might be worthwhile switching to monthly VAT returns.
- Customers: For many builders receiving DRC services, their VAT payments will increase because they are no longer paying builders VAT. This will definitely apply if the onwards sales to their own customers are still subject to normal VAT rules. It is important to budget for the higher payment due to HMRC.
VAT Accountant’s Conclusion
Most businesses will only have a Brexit or a Domestic Reverse Charge challenge to deal with in March, but hopefully not both. It will be business as usual for many.
There are also over a million businesses who have voluntarily registered for VAT, who will have to join the Making Tax Digital (MTD) regime for VAT periods starting after 1 April 2022; just a thought, but perhaps these smaller businesses should consider deregistering from VAT as an option to escape VAT completely.