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Five ways Brexit and DRC will impact VAT returns

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VAT returns submitted for the March 2021 quarter will be very different for many businesses, due to the impact of Brexit and the new reverse charge rules for builders. Neil Warren considers the key issues in his five-step guide.

30th Mar 2021
Independent VAT Consultant
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In association with
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Businesses will need to take extra care before pressing the ‘send’ button to fire off their March 2021 VAT return to HMRC. The figures will be very different in many cases compared to the previous quarter.

Since that time, we have had 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 there are no major errors. Here is my step-by-step guide.  

Step 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 below about Northern Ireland.

These boxes were only relevant when the UK was a member of the EU, recognising that the VAT treatment of EU trading in goods was different to imports and exports from outside the EU. But since 1 January 2021, there is no longer any difference between EU and non-EU trading – therefore, check these boxes are zero.   

Step 2 – deal with VAT correctly on imports

Imagine the following situation: John 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 John 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 John in Box 1 and Box 4 of his March return with a reverse charge entry based on the value of the goods. The net value of the import is recorded as an input in Box 7. John’s entries in Boxes 1 and 4 will be based on postponed import VAT statements downloaded from HMRC’s Customs Declaration Service (CDS).

Step 3 – consider Northern Ireland trading

Northern Ireland is still part of the EU’s single market as far as goods are concerned, so acquisitions will still be made from EU countries, with entries in Boxes 2, 4, 7 and 9 for each acquisition.

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, a welcome cash flow boost.

  • Reverse charge for builders

The new DRC system for the construction industry finally started on 1 March 2021. The DRC transfers the VAT payable on a sales invoice from the supplier to the customer.

Step 4 – code sales and purchase invoices correctly

The new rules affect both suppliers and customers of construction services. The correct coding of purchase and sales invoices should ensure that the correct VAT return boxes are completed:

Example

Plumber Pete has charged £500 for labour and £2,000 for materials on a ‘supply and fix’ job for Steve on 1 March 2021, which is standard rated and subject to the DRC.

John 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.

Step 5 – prepare for higher or lower VAT payments to HMRC

An important issue with DRC is its impact on the net amount of VAT payable or repayable in Box 5 – the deadline date to pay the March return is 7 May:

  • 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 will be the norm, it might be worthwhile to submit monthly 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 be ready for the higher payment due to HMRC.

Conclusion

Many businesses will only have a Brexit or DRC challenge to deal with in March – hopefully not both. It will be business as usual for many.

As a final tip, there are 1.1m voluntary registrations in the UK that will need to join the Making Tax Digital (MTD) regime for VAT periods starting after 1 April 2022.

According to HMRC, a quarter of these businesses are already signed up. Once the March 2021 return has been dealt with, it might be a good time for other businesses to follow suit and get ready for the compulsory starting date. Alternatively, perhaps deregistration might be an option to escape VAT completely?

Visit the Sage website for information on the solutions available for your practice and small business clients 

Replies (3)

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By Duggimon
31st Mar 2021 10:04

Worth noting, and I don't think too much has been made of it in what I've seen written about the DRC for construction, supplies made under the DRC do not count towards the VAT threshold.

This could be of huge benefit to those making mixed supplies with some under the DRC and some to end users, if supplies to end users are under £85K then there's no need to be registered.

Of course if they have significant inputs then this is no great benefit, but I think there will be more than a few out there for whom deregistering might be quite a boon, and even if they have no end user customers, if they have very few inputs then the time and energy saved in not filing returns might make deregistering appealing as well.

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By johnjenkins
31st Mar 2021 10:10

Great article Neil. Confusion abound, especially with reverse charge. We have clients who are still continuing as before. These clients are not the subbies who make a profit from VAT (which this is designed to stop). From that perspective, as long as the VAT is paid over, then, at least this year, there won't be penalties. Next year might be a completely different ball game, especially if there are no more lockdowns.

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By [email protected]
31st Mar 2021 17:26

Neil you may wish to advise duggimon and see why he has understood this from your article

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