Finance Act 2020 - VAT changes


Paul Cochrane

Paul Cochrane

Tax Director


The passing of the Finance Act 2020 will see several VAT changes coming into effect in the months ahead, including new regulations affecting the construction and agriculture sectors.

Construction Industry Domestic Reverse Charge

From 1 March 2021 a domestic “reverse charge” rule is being introduced, which will change the person responsible for accounting for VAT in relation to certain supplies of construction services. In particular, supplies between sub-contractors and main contractors will be impacted by the new rules.

What are the VAT changes?

Currently, a sub-contractor is responsible for charging and accounting for VAT to HMRC on supplies to main contractors. From 1 March 2021, the main contractor will be responsible for declaring the VAT on supplies received from the sub-contractor under the “reverse charge” rules. An equivalent VAT deduction can also be claimed by the main contractor subject to the normal rules of VAT recovery.

Who is affected by these changes?

Broadly speaking, the new rules will only affect supplies at the standard or reduced rate of VAT where payments are required to be reported through the Construction Industry Scheme. The categories of construction services affected by the VAT changes will include: general construction, groundwork construction, renovations and maintenance services, HVAC, cleaning services and painting and decorating of buildings and structures. Civil engineering work will also fall within this sphere.

Agricultural Flat Rate Scheme

New conditions for entering and exiting the Agricultural Flat Rate Scheme (AFRS) are being introduced from 1 January 2021.

The AFRS is an alternative to standard VAT registration for farmers. Businesses registered under the AFRS do not account for VAT or submit returns and so cannot reclaim VAT on costs. To compensate for this, AFRS businesses charge and retain a 4% flat rate addition on goods and services sold to VAT-registered customers.

With effect from 1 January 2021:

  • Businesses can join the AFRS when their annual turnover for farming related activities is below £150,000.
  • Businesses must notify HMRC once their annual turnover for farming related activities exceeds £230,000. Once this threshold has been breached the farming business must deregister from AFRS and register for VAT instead.
  • If turnover from non-farming related activities exceeds £85,000, a business must leave the AFRS and register for VAT instead. Non-farming activities can include the provision of bed and breakfast or holiday accommodation, charges to visit the farm, riding lessons and so on.

Get in touch

If you would like to discuss any of the matters outlined above please get in touch with me at Paul.Cochrane@jcca.co.uk, or your usual Johnston Carmichael adviser.