How To Avoid Common Tax Mistakes In Construction Accounting
In this article Ben Cussons, Business Advisory Partner, looks at some of the common mistakes businesses make when it comes to the accounting of construction related activities, and some useful guidance to ensure compliance.
What do HMRC focus on in construction? It’s fair to say that no matter your industry, no one wants HMRC trawling through everything. It’s a costly and timely exercise and that’s without the current inefficiencies of HMRC to contend with. However, HMRC continue to be of the opinion that the construction sector is plagued with fraud and deceit. So, changes implemented on 1st March 2021 to the VAT regime specifically targeted the construction industry with the introduction of the domestic reverse charge scheme. Introduced to place the onus of reporting and paying to the main contractor in a construction project, and based on HMRC reasoning that many smaller sub-contractors were charging VAT when not even registered. These amounts then didn’t make their way to HMRC and were instead additional undeclared profit. How does Domestic Reverse Charge VAT work? In essence, although declared and shown on the invoice to the contractor, the VAT is deducted
For example:
But whatever side of the transaction you’re on, if you’re getting this right you’ll reduce the likelihood of an HMRC VAT review or enquiry. And whilst HMRC wouldn’t be as explicit as to say so, based on their limited resources and the objective of these reviews being to identify non-compliance, then it would make sense that if you‘re reviewed and they can see that you’re following the guidance, your chances of a future review will be reduced. What is the Construction Industry Scheme? CIS is applied to all sub-contractors in the construction sector when working for another contractor, be that directly for the main contractor or another sub-contractor in the supply chain of the project. CIS is withheld from the payments made to sub-contractors and is deducted either at the main rate of 20%, the higher rate of 30% or if a sub-contractor has gross status, then 0%. So, based on our earlier example, the amounts deducted would be either £2,000, £3,000 or £0 as the amounts calculated for deduction ignore VAT and are only on the supply of labour, not materials.
If a sub-contractor invoices £10,000 for the construction services provided, with the VAT added at 20% it would make the gross value of the invoice £12,000. Under this new regime, the VAT is the retained amount by the main contractor and the net amount due to the sub-contractor (ignoring any CIS implications) is £10,000. The main contractor then shows an output and an input on their VAT return, for VAT due and VAT reclaimed, meaning their cash outlay is lessened by retaining the sub-contractors VAT. This now means the sub-contractor loses out on the cash flow advantage of being paid the VAT and the timing delay in this then being paid to HMRC. The change has seen many construction businesses, particularly those who fully sub- contract, move to monthly VAT reporting to speed up the receipt of the repayments of VAT incurred on their costs, and to aid cashflow.
from the invoice in a similar way to the Construction Industry Scheme (CIS).
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