VAT Accounting for Construction Companies

Confused about how the VAT reverse charge affects your business? Need help managing your VAT accounting? Don’t get caught out by new VAT rules – let the experts at Empowered by Cloud take care of your taxes.
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Accounting services for VAT registered construction businesses

If you offer building and construction services as a VAT-registered business, you’ll need good accounting systems to help you manage your VAT invoices, VAT returns and VAT payments.
Luckily, you don’t have to muddle through yourself or become a VAT expert. You can trust the team at Empowered by Cloud to take care of everything for you.

We only work with construction businesses, so we understand which VAT rules apply to the construction sector. We can help you make sense of the domestic reverse charge, complete your VAT return each month, and help you manage your cash flow.

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VAT construction

Do construction businesses have to be VAT registered?

Businesses do not have to be VAT registered to work in the construction industry unless their annual turnover is over £85,000. This applies to both sole traders and limited companies.

If your turnover is under the VAT threshold, you can choose to register for VAT (voluntary registration). Some subcontractors do this as it allows them to reclaim VAT on goods they buy for their business.

VAT registered businesses are issued with a VAT registration number and must charge output

VAT on sales of goods or services. Their VAT invoices should show the VAT rate for each item. VAT invoices must also show when the domestic reverse charge has been applied.

VAT registered companies will also need to submit a VAT return to HMRC detailing input VAT and output VAT. Any VAT owed to HMRC must be paid on time to avoid penalties.

You can submit your own tax returns, but most VAT registered companies engage the services of an accountant to ensure they do not overpay or underpay.

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Are the VAT rules different for construction companies?

The VAT rules for construction companies aren’t necessarily different to other sectors, but they can be more confusing.

Working out how much VAT to charge can be a challenge in itself, and there’s also the reverse charge element to consider.

In some cases, you apply normal VAT rules to a sale and create a normal VAT invoice for the customer. In others, you may need to apply the domestic reverse charge.

What is the VAT rate for building and construction services?

VAT rates for construction services may be charged at standard rate (currently 20%) or reduced rate (currently 5%). Certain construction services are charged at zero rate (0%). The VAT reverse charge is only applicable to standard and reduced rate services.

Calculating how much VAT to charge can be confusing. You can find government guidance here, but to save yourself the headache, you might find it more beneficial to work with Empowered by Cloud.

We specialise in construction accounting and will ensure you use the correct VAT rate, show the correct information on your VAT invoice, and account for all input tax and output tax on your VAT return.

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What is the domestic reverse VAT charge?

The domestic reverse charge (or VAT reverse charge) was introduced in 2021 to combat missing trader fraud.

Missing trader fraud happens when a VAT registered company delivers services and charges output VAT on sales but does not pass the VAT to HMRC. Instead, they close the business and keep the VAT they collected.

The VAT reverse charge means VAT is no longer passed along the supply chain. Instead, it is recorded on VAT invoices but is only paid when it reaches the end-user.

The domestic reverse charge only applies to certain construction services. The affected services are similar to those that apply to the construction industry scheme.

What does the domestic reverse charge mean for contractors registered under the construction industry scheme (CIS)?

When one UK VAT registered construction business (for example, a subcontractor) supplies construction services to another UK VAT registered supplier (main contractor) who is supplying services to an end user (for example, a housebuilder), the domestic reverse charge may be applicable.

The idea of the reverse charge is the VAT is only paid at the end of the supply chain.

You are likely to be affected by the VAT reverse charge if you supply construction services to other contractors, use labour-only subcontractors or provide labour-only construction services. The reverse charge does not apply to the supply of staff.

When does the VAT reverse charge apply?

The VAT reverse charge will apply if all the following conditions are met:

  • The supplier and customer are VAT registered
  • Payment for the supply is reported within the construction industry scheme (CIS)
  • VAT is charged at standard or reduced rate
  • You’re not an employment business supplying staff, workers, or both
  • Your customer has not given written confirmation that they are an end user or intermediary supplier

If you are unsure when to apply the VAT reverse charge, speak to a construction accounting specialist who will help you navigate the tax rules surrounding the domestic reverse charge.

How do you complete VAT returns?

VAT returns are usually completed every three months, although it is possible to apply for monthly VAT returns. Your returns should include:

  • Total sales and purchases
  • Amount of VAT you owe
  • Amount of VAT you can reclaim
  • Amount of VAT you’re owed from HMRC (if you’re reclaiming VAT on business expenses)

As part of the government’s Making Tax Digital scheme, you must submit tax returns digitally using compatible accounting software (unless you are exempt). You can do this yourself or appoint an agent or accountant to do this for you.

Which accounting software should you use for VAT returns?

At Empowered by Cloud, we recommend any business operating in the construction industry use Xero as their accounting software.

Xero is compatible with Making Tax Digital, so you can use it to submit VAT and CIS returns. You can also create and send VAT invoices, track expenses and reconcile bank transactions using Xero.

We believe it is the best accounting software for the construction sector. If you are not already using Xero, we can get you set up and train you on how to get the most from it.

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Is registering for Making Tax Digital compulsory?

Yes. You must keep digital records if you are a VAT registered business. There are only a few special circumstances in which you would be exempt.

But the good news is software such as Xero has made it easy to comply with Making Tax Digital.

And the even better news is that using cloud-based accounting software offers many additional benefits, such as making it easier to track expenses and keep control of your cash flow.

Don’t panic if you’re a tech-phobe. Our team will get you using Xero confidently in no time, leaving you wondering how you ever got by without it.

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How can Empowered by Cloud help with VAT for construction firms?

As well as getting you set up on Xero, we’ll help you get to grips with the reverse charge, understand when the reverse charge applies, and take care of your VAT returns.

But that’s not all. We specialise in providing accounting services for the construction sector. We act as your virtual finance department, offering proactive accounting advice, keeping you compliant with HMRC and giving you greater control over your cash flow.

Why choose Empowered by Cloud?

Because we only work with construction companies, we make it our mission to understand everything there is to know about the industry.

This means we understand all tax rules inside out, including everything relating to the VAT reverse charge, the construction industry scheme (CIS) and how to manage cash flow issues effectively.

Our team is made up of specialists, all with experience working with or in the construction sector. You get access to bookkeepers, payroll managers, credit controllers, tax specialists, CIS experts, accountants and a finance director who can help you grow.

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What services do Empowered by Cloud offer?

We offer everything you would expect an accountancy firm to offer – payroll, bookkeeping, tax returns, accounting, credit control – plus a whole lot more on top.

We excel in creating effective, efficient accounting systems and supporting our clients in growing successful, profitable, sustainable businesses.

All our packages are created around the needs of our clients and are designed to be flexible so you continue to get the support you need as your business evolves.

Virtual Finance Department

Virtual finance department

Access the skills you need, as you need them, rather than trying to train and sustain an in-house team.

From the everyday finance operations involved in running a busy business to the ins and outs of your company accounts, we ensure you stay HMRC compliant and remain agile.

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Virtual finance director

Your virtual finance director will help you stay on track and achieve your business goals by ensuring you have the information and support you need to make sensible business decisions.

We help you see the bigger picture, safeguard the growth of your business and reduce risk through our expertise.

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Xero set up

Xero set up

If you’re not already using Xero, you should be – it makes managing your accounts easy. We’ll get you set up and feeling Xero confident in no time, and you’ll wonder how you ever coped without it.

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Xero training

Xero Training

We tailor Xero training to the specific needs of your teams and your business. And with our expert knowledge of the construction industry, we know which apps you need to get your business running efficiently.

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Why choose Empowered by Cloud?

Unlike some accountancy firms, we aren’t generalists – we only work with companies that operate within the construction industry.

It doesn’t matter whether you are a sole trader, partnership or limited company, as long as you provide construction services. You should also have a turnover of £500k or above and be looking to grow your business.

If you fit the bill and want an accountant that does more than just file your tax returns once a year, get in touch.

Contact Empowered by Cloud today

Financial outsourcing might sound complex, but our virtual finance team make it simple. Get in touch today to discuss how Empowered by Cloud can help you build a more profitable business.
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