VAT reverse charge and the flat rate scheme
There are special VAT rules for building contractors and sub-contractors that came into effect on 1 March 2021. The new rules make the supply of most construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge only applies to supplies of specified construction services to other businesses in the construction sector.
This means that since 1 March 2021, sub-contractors no longer add VAT to their supplies to most building customers, instead, contractors are obliged to pay the deemed output VAT on behalf of their registered sub-contractor suppliers. This is known as the domestic reverse charge.
There is an interesting exception for users of the flat rate scheme that means that reverse charge supplies are not to be accounted for under the scheme. Flat rate scheme users who receive reverse charge supplies therefore must account for the VAT due to HMRC and recover it simultaneously on the same VAT Return. Users of the scheme should consider if it’s still beneficial for them bearing in mind that under the scheme they cannot recover VAT incurred on purchases of materials and other expenditure subject to a VAT charge.