As we are still in the middle of Lockdown 3.0, it was interesting to debate the best strategy for businesses considering their own pivot as many may still make this decision over the next 12 months.

My co-podder Alan Clark introduced two useful strategies; one of ‘best of breed’ and the other of ‘integration bundles’ to use when considering the route to take.

As a best of breed example, Alan cited the recent acquisition of Slack by Salesforce. At $27.7 Billion, the deal is the Martech world’s most valuable integration ever and was seen as a good enough investment to meet the current work-from-home scenario and growing demand for 100% secured Cloud-based apps for the digital economy.

As the global leader in CRM Salesforce specialises in improving external relationships with clients and prospect leads, so its decision to buy Slack, a workplace productivity tool represents a pivot strategy that brought together two game-changing organisations and now provides Salesforce a platform to improve communication and productivity internally as well.

In 2015, just 18 months after it launched, Slack reported having more than 1 million daily users — a figure then unheard of in enterprise software. When it was sold that figure had reached some 12 million. In response, Microsoft, using a design similar to Slack’s own, added Teams to its 365 portfolio without increasing the price and used an integrated bundle approach to take Teams from zero to more than 115 million users.

That disparity and ongoing demand for the Microsoft product perhaps helps to explain why Slack sold itself to Salesforce in the end. At Cypher, we still use Slack mainly as a replacement for email. We let clients have their own channels and it means they can contact us very quickly whenever they need to.

For transparency, I feel that Cypher operates a largely integrated bundle model, insofar as we do lots of different things and our clients get a bundle of services that they pay a monthly retainer for. But I also want to be best of breed and we pride ourselves on client astonishment, that’s just how we roll!

It was interesting to debate with Alan whether there was room for a middle ground; a ‘best of breed bundle’ if you will. A model where you do operate an integrated bundle strategy but within that bundle each product is market-leading. That would make a very strong business offering. But is it sustainable?

One of the reasons I am so fascinated by this subject is that we have a lot of conversations with clients around the fact that the business they have now, will not be the same in 5-years’ time. It might do a lot of the same sort of thing, but there will inevitably be change along the way. Having a polar opposite perspective on the route your business might take on this journey can lead to the establishment of a whole new set of income streams.

A recent example was the creation of the Oxford Fire Door Company by our client Rowood Kitchens and Joinery. Business was good, but Nick Rowland the MD spotted a gap in the market and wanted to fill it – literally, with bespoke, handmade fire doors.

When this growth happens, and it does more often that you would think, we discuss with the business owners whether the new companies will sit within the current business or whether they will completely stand-alone. For me, the way to answer that question is to understand the risks your new venture presents to your current business. Two separate downsides are that the new business could blow up instantly and make you loads of money, side tracking you from the one that has paid the mortgage for all those years, or there is a risk that you go off, set up company B and it’s awful, it damages the current brand and basically comes back to bite you.

Take innocent smoothies.  They built their brand on being ethical, fresh and innovative. They were bought by Coca-Cola and whatever your thoughts are on the ‘real thing’ the acquisition absolutely tanked the Innocent brand. On a small business level, if you set up a new business but don’t stick to the principles that made the first business so strong, maybe you don’t treat companies right, don’t treat customers right, don’t do a good job, perhaps because you are stretched too thin, then it can only do damage to the existing business.

It is still too early to know for certain what plans Saleforce has for Slack, or how successful the integration of two very different cultures with be, but based on this pivot strategy, as a small business owner who is used to being best-of-breed, it does sound hard to integrate with another business as a bundle or as a new company without diminishing the value of one of them. It feels a bit like chasing unicorns.

Ever the optimist, however, Alan points out that the mere possibility of being a business owner who is able to be across four or five businesses and can keep them all at a very high service level for a period of time should be exciting for anyone and reason enough to try.

The decision for business owners to pivot may not have been so much a choice as a final throw of the dice as Covid has forced many to consider new routes for diversification. For those still considering their next business step, I think my main advice is to not make that next step too big.

Pivoting can be risky in a normal world; doing so in lockdown presents a whole new set of challenges. To pivot successfully, using the Ansoff Matrix model, for me ideally you would take a relatively small step and sell something new to your existing customer base.  Leverage the trust and competency that your customers associate with your current portfolio to offer them a slightly different, or better still, complementary product. I would certainly not advocate creating one that affects your ability to grow your current business in the future.

My second piece of advice comes from the recent ‘Everyone Competes with Amazon podcast’. We also wrote a blog on that. Look at your new pivot business through the ‘Amazon lens’; what can you do better and more efficiently to delight your customers even more?

And finally, from a podcast on looking for Clarity, not Certainty, if you are considering a pivot for your business anytime soon, it doesn’t matter whether you want to pursue a best-of-breed or integrated bundle strategy. Whether you run one business or five, as a business owner, you can own the position they enter the market, you own the decision on the products and services you will offer and you own their quality, how well they are delivered and the level of customer service you want to offer.

Whatever your model, control what you can and knowing these two possibilities hopefully it will help you create a pathway for a successful pivot.

It’s the one we use on our own website, so we can vouch for how well it works at providing us fantastic customer service and improved lead generation.

Melu’s UK based team of operators look after live chat on your website, so you know there’s always someone there to look after your visitors when they need something.

You can try Melu free for 14 days, with no credit card details required and no commitment.

We’ve negotiated a discount on the monthly fees for our clients, so don’t miss this opportunity to get more from your website today with their free trial and discounted rate.

Option 1: Weekdays – 8am to 10pm Monday to Friday – £79 + vat per month (normally £119, save £40)

Option 2: 7 days a week – 8am to 10pm every day – £99 + vat per month (normally £139, save £40)

Option 3: 24/7 coverage – £129 + vat per month (normally £179, save £50)

To sign-up, visit https://meluchat.com/try-melu and type the code CYPHER into the promotion code field to get this exclusive discount.

This pivot to a physical store location represents a complete 180 from Jeff Bezo’s early dreams of opening an on-line book store to disrupt the established bricks and mortar brands, but it is yet another example of the constant innovation we have seen from Amazon since its inception in the mid 1990’s.

It will be interesting to see how this till-less offer develops and the reaction is elicits from other supermarket brands as Amazon starts to compete with their traditional retail offering. It also sparked a discussion that Alan Clark and I had on a recent Mind Your Business Podcast episode, that now every business, whatever their product, service or sector now competes with Amazon.

As most of you reading this will know, I run an accountancy business, so you might ask what right do I have competing with Amazon? I don’t sell products, I am not a distributer of goods, I certainly don’t package my advisory service up in a cardboard box with an A-to-Z swoosh on it and leave it in your greenhouse!

So let me explain what I mean by this statement.

The way I see it is that, today, if you want to buy literally anything, at some point you will go to Amazon. In that Amazon world you will have a huge choice and instant access to a range of products in your search stage. Let’s say you want to buy some Bluetooth headphones. You use the search function, which returns hundreds of options-the algorithms are very clever, they make sure you see what you want – or what Amazon and its thousands of Bluetooth headphone sellers’ want- and when you make your choice, you can proceed to the checkout, pay instantly and have them delivered literally later that day.

Amazon has built a business that delivers instant gratification. It has built a proposition that whatever you want, you will be able to find and buy it, or get the answer to a question you need resolved within the working day. This proposition is now integral to everyone’s life. So, even though my business is in the professional services sector and it can take months to deliver a product or service, we now have to treat our customer experience like we are Amazon.

For example, when we talk to a prospect client, they can get a proposal from us instantly. It can be digitally signed, while we are in the meeting with them discussing it. When they become a client, our on-boarding process is digital and seamless. And since the start of lockdown we have also made the conscious effort to always be available. Clients can contact us whenever or however they want. Whether their preferred channel is WhatsApp or Slack or email or a telephone call, we will be accessible.

For too long, particularly in the professional services sector, a potential client will choose a firm, they all agree terms in principle and then nothing happens for a week. The client chases, and in return receives a tatty email which says, ‘yes we can put together your shareholder’s agreement, it will be £1,500 plus VAT’. In the meantime the Amazon generation has spoken to a competitor, who didn’t keep them waiting, has got a price, signed a deal and moved on. Boom.

That is the new ground we are all competing on; instant gratification, or at least a much quicker acknowledgement and follow up process.

To compete with Amazon we have to turn things around in real time. It’s not necessarily because we are flashy, it’s because our client base are young entrepreneurs. Millennials or Gen Z are used to being able to sign on the dotted line and immediately start receiving the service they have asked for.

If it takes more than an hour from meeting a prospect to give them a proposal and sign them up as a customer, then someone in your industry will get there quicker and you will be haemorrhaging potential sales.

And I think this is now true for hundreds of businesses.

Amazon has conditioned us to expect to be able to pick apart a product and put it back together the way we want it, at a price point that suits us. So your operations and sales processes have to evolve to match this expectation. If you have a business model where customers can buy various different versions of the same product or service, meaning they can select from a basic budget model right the way up to platinum, with 100 different options in between, then from their experience of Amazon, your customer is going to want to instantly understand all of those options, the costs, where the differences are, and pick a solution that best suits them.

The concept of telling customers that they can have any colour they want, as long as it’s black and that the car will be ready ‘when it’s ready’ is obsolete. With its first foray into a book of the week spotlight, Amazon first brought us standardisation, then customisation and now personalisation. That is what we are competing with.

There’s also the consideration of how you deal with something if it goes wrong. We purchased a monitor from Amazon- that we had delivered not to the office but to the home of a new starter, because we were working remotely which had a fault with the power pack. We contacted Amazon and requested a new one. They said they couldn’t break up a monitor and power pack set so they would just send out a complete unit. Importantly, the whole process took less than two days and came with no stress and no quibble. A problem was fixed and we are still loyal customers.

Every small business I work with has a built-in guarantee like this. One of our clients specialises in beautiful handmade kitchens and joinery. They don’t talk about their guarantee at all and the reality is very few people experience it because they make sure they get it right first time. But if someone spent £40,000 on a new kitchen that wasn’t quite right, they fact is that Rowood wouldn’t hesitate to fix it and wouldn’t leave the site until it was put right. That’s their guarantee but they don’t shout about it. Amazon has ensured that its vast customer base expects that when something goes wrong it will be put right, no hassle, no arguments. If your customer service doesn’t match this level, someone else’s will.

Amazon is also a great entrepreneurial story. When he started, Jeff Bezos was absolutely not an expert in distribution chains but rather a guy in his garage trying to create an online book store. In another blog we talked about skyscrapers and how easy it is to only see the final product and ignore the years of hard work it took to get there. If you look at the first iterations of the Amazon home page and its book of the week section you will see how far the platform has come. Amazon probably sells more books than anyone else in the world but the lesson here for every business owner is that the business you have today will not be the business you have in five years. Allow yourself to grow and evolve.

Amazon is also binary; you either buy the product or you don’t. There’s no hard sell. A lot of business owners, certainly in the first few months of trading, fall into the trap of needing to sell to everybody, all the time. As the saying goes, everyone with a chequebook and a pulse is a potential customer. We have a restaurateur as a client; he runs a top-quality restaurant and is very clear on his menu, his price and who his customers are. A lot of people think it’s too expensive, but he’s ok with that because the price reflects the time it takes to prepare the dishes and the quality of ingredients he uses, it is a destination restaurant.

We talked in a previous pod about looking for clarity, not certainty in a business. This is an example of that clarity. This restaurateur has never had certainty that people would flock to eat at his restaurant, but by getting clarity on what he can control he has built a core fan base and has developed a thriving business. Like Amazon, he presents you with what he thinks you will like.

We started off with quite a bold statement about how every business now competes with Amazon. It’s not necessarily their products or service, but rather in the way their customers have been trained, by Amazon, to expect certain standards from every other supplier they deal with.

Whether you are a barber shop, an accountancy, a funeral directors, a restaurant, or a professional services business, your customers have been indoctrinated by Amazon to expect that they can pull apart your product and put it back together exactly how they want it. They can get instant gratification in terms of receiving whatever they order, and can enjoy a really well-rounded guarantee of customer service, if something ever goes wrong.

Whatever business you are in, you need to focus on your customer touch points. Whether it’s your initial engagement and proposal process, how you on-board a client or how you package your product or service, take a look at your operation and then Amazon it, because as customers that is now the model we expect.

I had created this vision for something that might happen in the future, which was a complete horror story for my business and my life. Enter Alan, who provided another perspective, grounded in fact and logic. I chose his route and I am pleased to say that my personal horror story didn’t end the way it could have in my head.

As a business owner, whether you are running a new start up or a business that has been around for generations, sadly you can, quite easily, become the director, producer, scriptwriter and actor of our own horror story.

Talking to Alan, Scary movie land is a land of perception, a self-created perception that has a massive impact on how we feel, how we act, what decisions we make and ultimately how we perform. Part of this self-creation stems from the context we create and the language and words we use to describe a situation we find ourselves in. I was describing my situation as one where I wasn’t going to have enough money to pay back what I owed. It was catastrophic; it was the end of the world. In that context I was seeing myself as a failure, it was muddying my emotions, it was slowing me down and I was becoming limited.

To break the funk I was in, Alan encouraged me to talk about the service I wanted to give, my purpose for creating Cypher, the offer I was making to the world and how I wanted to inspire people through what I thought was possible from an accountant. It was a powerful moment. It helped me to reconnect with my passion and reminded me why I created Cypher in the first place. Of course, I had to keep a level of clarity on what needed to happen to pay the money back, but logic and the business financials showed me the likely end of the movie. Spoiler alert…we are still going strong.

One way to explain my self-perception is that the mind is a powerful thing that is designed to protect you. It is hard wired to make you pull back every time you get too close to the edge. It throws up all the possible negative outcomes to ultimately keep you safe in the status quo. But once you see passed that, see what’s likely, what’s possible even, then the weight off your shoulders is significant.

To help get a different perspective, Alan describes four domains through which one can view any situation. They are Logical, Emotional, Spiritual and Structural. Needless to say the more balance we can achieve, the more developed we are in each of these domains, the better our decision-making and the better our performance as we let go of the baggage that is dragging us down.

I was stuck in the emotional domain, which was draining my energy and limiting my performance, Alan, urged logic – and financials – to frame my context in a better way. A more accurate way in fact. He also reconnected me with my purpose through the spiritual domain and because of the structures we had already put in place at Cypher, we had created the ability to thrive.

To prevent your business’s movie from having a horrible ending and add a different perspective to your context, both Alan and I recommend creating partnerships with other professionals. To keep the movie metaphor going, they can become your supporting cast and crew. This could be a business coach, a marketing consultant or an accountant who can each give you access to new expertise, a new perspective that can help guide you.

Secondly, try to connect with your emotion, be clear what is it you are feeling, own it and be prepared for an honest answer. You might be too scared to look in the metaphorical basement because there may be a scary monster in there and you don’t want to confront it. Stay true to the intent you had at the start of getting better at whatever you do and suddenly you will access more useful insight and do less ruminating. Alan always recommends using your emotion to help you.

A trick Alan shares on the podcast is that if you use language like ‘I worry that’…for example; ‘I worry that I won’t sell enough’ or ‘I worry that my clients aren’t happy’, guess what, you are rewarded with a lot of worry. Instead, change your language to ‘I wonder how….’ So, for example; ‘I wonder how I can deliver a better service’, ‘I wonder how I can compete with bigger businesses and win more profitable clients’, then you will be rewarded with a more creative mindset, you will feed your purpose, which is liberating.

Another example of this change in mindset is giving bad news. Sometimes you have to have difficult conversations or give a client bad news. It is unavoidable. In my experience those conversations are never ever as bad as you think they will be. You build them up to be another brutal scene from your horror movie, when in reality they aren’t. As business owners, we have to be comfortable with the fact that not every interaction will go perfectly, not everything will be optimal every time. The important thing is recognising that generally it isn’t as bad as we think it will be and then doing something about it. Don’t fixate on the ‘what ifs’, think, ‘what else’.

Alan says we have around 6000 conscious thoughts a day (Google it). Not all of them are spent in the present. A percentage of these will reminisce in the past, while others will transport us to the future we have created- good or bad. If we accept this and come up with an accurate way to explain the situation, past, present or future while remaining true to our intent then it will change our context, change our perception of ourselves. it will change you into more joyous passionate emotions your axe bolder and your create better things for both yourself your business and your clients. Remember we create our own experience.

So much anxiety for business owners stems from a desire to make everything perfect; every client interaction, every piece of work. In reality that will never happen and often you don’t have to be the best in the world at what you do, but you need to be good enough. We have around 200 clients in our business and if three had an issue, this would have kept me up at night. In reality if I speak to them directly two may not see their issues as that big, the other may have a genuine concern, but the important thing is that by addressing it, understanding it, we will do something about it thus preventing the catastrophe we have predicted.

In summary, we called the podcast ‘Don’t create your own business horror story’. This title was based on the premise that perception and context are all self-created. How we describe a situation to ourselves is often how it will turn out. Identify the emotions you are experiencing about a context and try to view it through a new lens, ideally with the help of someone else. Getting clarity about the context and the situation can move you away from negative thoughts and lead to higher performance. Open the basement door, take a torch with you and confront the monster. It is unlikely to be as big or as scary as you think.

There is a large waiver that accompanies this blog. If you do find yourself in a rickety old house, isolated on the moors and you hear a banging under the floorboards, don’t go down there. In this context horror movie rules do still apply!

Before today’s announcement he was clear that he would focus on three areas in particular; protecting jobs, protecting businesses and protecting the housing market. Our initial thoughts are that it feels like it’s a budget that is good for business and particularly small business which is the majority of our client base.

Along with the extension to the furlough scheme until the autumn and a freeze on personal tax allowances, three things stood out for us in the details of the speech, the widely anticipated Corporation Tax increase isn’t as bad as predicted, the super deduction and increases in capital allowances will represent massive savings for businesses that invest in plant material or electric car fleets and with the potential for an even bigger impact is the news that the loss carry back period for businesses has now been extended.

Let’s start with the Corporate Tax Rate rise to 25%

To balance the need to raise revenue with the objective of having an internationally competitive tax system, the rate of corporation tax will increase from April 2023 to 25% on profits over £250,000. The rate for small profits under £50,000 will remain at 19% and there will be tapered relief for businesses with profits under £250,000 so that they pay less than the main rate.

Firstly, the rate isn’t going up until 2023, so that does offer businesses the chance to bounce back somewhat after Covid, and realistically, I think 90% of small businesses will not be paying the new headline 25%. A huge amount will remain on the 19% rate they are paying now while under the new tapered system, the rest will be somewhere between 20 and 23%. Interestingly, under the previous budget, pre-Covid, the corporation tax rate was due to be going up past19% anyway. The flat rate was going up to 20, 21 and 22% over the next few years. So actually a number of small business with profit below 50K could look at this like a tax cut!

Linked into this is the super deductions capital allowances scheme.

From 1 April 2021 until 31 March 2023, companies investing in qualifying new plant and machinery assets will benefit from a 130% first-year capital allowance. This upfront super-deduction will allow companies to cut their tax bill by up to 25p for every £1 they invest, ensuring the UK capital allowances regime is amongst the most competitive in the world.

For businesses that buy plant machinery, electric vehicles or anything that capital allowances would normally apply to, or anything you would have got annual investment allowance for this is huge.

The chancellor has also removed the annual investment allowance limit. It was £1m which sounds like a lot but we have agricultural clients that can easily spend that in a year. It now appears the £1m limit has been abolished, and there is another 30% added to the tax relief you can claim.

The final and possibly biggest news of the day is the extended loss carry back for businesses.

To help otherwise-viable UK businesses which have been pushed into a loss-making position, the trading loss carry-back rule will be temporarily extended from the existing one year to three years. This will be available for both incorporated and unincorporated businesses.

In addition:

• Unincorporated businesses and companies that are not members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22
• Companies that are members of a corporate group will be able to obtain relief for up to £200,000 of losses in each of 2020-21 and 2021-22 without any group limitations
• Companies that are members of a corporate group will be able to obtain relief for up to £2 million of losses in each of 2020-21 and 2021-22, but subject to a £2 million cap across the group as a whole

At present if you make a loss in any given year, you can carry back that loss against profits you made the previous year. So let’s say you made £100,000 profit and paid £19,000 in tax last year, but this year you lost £50,000. Under the old rules you could carry that £50,000 loss back and get half of your £19,000 of tax back.

The new rules mean that we can go back two years.

So, if you made £50,000 of profit last year, but due to Covid you made a substantial loss of £100,000 this year, under the old scheme you would be unable to go back and recover the £50,000 loss over and above last year’s profits.(instead you would have to carry the rest of the loss forward against future profits). Now you can carry all of the losses back against profits last year, and if necessary go back to the before that and use any of the profits there. And if there are still losses that haven’t been relieved, at that point you can go back to the year before. Any regained funds will come in as a tax refund, which could represent a massive cash flow injection for a number of businesses.

There was also good news for a number of the sectors we support. The chancellor announced the up-to-£500,000 “nil-rate band” for stamp duty will finish at the end of June, rather than the end of March, as planned, which will continue to drive activity in the housing market.

The government will also provide ‘Restart Grants’of up to £6,000 per premises for non-essential retail businesses and up to £18,000 per premises for hospitality, accommodation, leisure, personal care and gym businesses, giving them a level of cash certainty to plan ahead and safely relaunch trading over the coming months. The government is also providing all local authorities in England with an additional £425 million of discretionary business grant funding, on top of the £1.6 billion already allocated. We will work with clients in these sectors to access these funds as they need them.

What is it?
Domestic reverse charge (DRC) is a new way of accounting for VAT, it will apply to all VAT registered construction businesses in the UK. The new legislation is being introduced as an anti-fraud measure, it intends to cut down on the ‘missing trader’ fraud, where companies receive high net amounts for VAT from their customers but have no intention of paying the VAT to HMRC.

From Monday 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.

The charge applies to standard and reduced-rate VAT services:

• for individuals or businesses who are registered for VAT in the UK
• reported within the Construction Industry Scheme

What does it mean for you?
Firstly, please do not panic, put simply, the new legislation moves the VAT liability from the supplier (subcontractor) to the customer (contractor) but also not always, only if certain criteria is met, so please read on and we hope this document helps. There is a lot of information included here, so please do not hesitate to contact us if a call would be useful.

If you are a CIS subcontractor you will no longer charge VAT to your CIS customers. Instead, on your invoices you need to state your customer is responsible for the VAT and show what VAT rate should be applied.

If you are a CIS contractor when you receive a bill from your CIS subcontractor you are responsible for reporting both the input and output VAT on that bill.

This change may impact your cash flow. If you are a subcontractor then it’s likely your short term cash flow will be adversely impacted as you will no longer be receiving the VAT element from your customer. If you are the contractor, you will likely have a short term cash flow benefit.

Good News
If you are on Xero, they are ready and the movement to DRC will be pretty straight forward. Once we get our heads around when we charge who for what, Xero will handle the VAT return calculations with the introduction of the new tax codes. We will make these live for you and you will see these available for use from Monday. By using these new tax codes your sales invoices will be prepopulated with the required note that no VAT is charged under the domestic reverse charge. It also applies the correct treatment itself on the return, where the amount basically goes in quite a few boxes and would otherwise give us all a headache, so thanks Xero for making this step easier!

For most, this is another scheme that you will not need to know much about. VAT loves schemes and there are quite a few around, but it is something we need to bear in mind so we are hoping this fact sheet will just make life a little easier.

Finally, we are obviously on hand if you would like to talk through any of this information or if you would like us to go through your first invoice under the scheme together please do not hesitate to contact us and we are more than happy to talk.

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

If you would like to talk to HMRC their contact details are:

CIS Helpline on 0300 200 3210 (or +44 161 930 8706 if outside the UK).

VAT Helpline on 0300 200 3700 (or +44 2920 501 261 if outside the UK) for any uncertainty or clarity on whether the reverse charge applies.

Let’s understand if the work you are carrying out is subject to DRC?

When you must use the reverse charge
You must use the reverse charge for the following services:

• constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
• constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
• installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
• painting or decorating the inside or the external surfaces of any building or structure
• services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works

When you must not use the reverse charge
Do not use the charge for the following services, when supplied on their own:

• drilling for, or extracting, oil or natural gas
• extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
• manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
• manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
• making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
• installing seating, blinds and shutters
• installing security systems, including burglar alarms, closed circuit television and public address systems

Subcontractors – what do you need to do?
Life just got a little simpler for you! If applicable you do not need to charge VAT, you just need to state on your invoices that your customer is now liable for the VAT and you just state if this is at 20% or 5%. Do this in Xero by using the appropriate tax rate when creating a sales invoice and they does the rest! Now let’s look at who this will apply to:

The reverse charge will need to be used if you sell building and construction services when:

• your customer is registered for VAT in the UK
• payment for the supply is reported within the Construction Industry Scheme (CIS)
• the services you supply are standard or reduced rated
• you’re not an employment business supplying either staff, workers or both
• your customer has not given written confirmation that they’re an end user or intermediary supplier

If the criteria above is met – What you now need to do:

1. Check if your customer has a valid VAT number.
2. Check your customer’s CIS registration.
3. Review your contracts to decide if the reverse charge will apply and tell your customers.
4. Ask your customer to confirm whether they are an end user or intermediary supplier with a written notification, as discussed below
5. Record the invoice in your accounts with the correct VAT treatment.

As a subcontractor you should also be aware that your customers will no longer be paying you VAT, which will reduce the gross value of payments coming into your business, as no VAT will be due on payments from customers where the supply is covered by the reverse charge. So you’ll need to consider and plan for the impact of this on your day-to-day cashflow. On the bright-side though, you aren’t having to worry about a large VAT bill when the VAT you have been collecting for HMRC is due!

What if the criteria is not met – Who does the reverse charge NOT apply to?
The reverse charge does not apply to any of the following customers:

• A non-VAT registered customer
• ‘End users’ i.e. a VAT registered customer who is not intending to make further on-going supplies of construction
  • For reverse charge purposes consumers and final customers are called end users. They’re businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.
  • The reverse charge does not apply to supplies to end users where the end user tells their supplier or building contractor in writing that they’re an end user.
• ‘Intermediary suppliers’ who are connected e.g. a landlord and his tenant or two companies in the same group
• Overseas customers – it only applies to UK companies providing building and construction services in the UK

If you supply services that are not subject to the reverse charge, for example to private individuals or end users, you must account for VAT as you did previously, either standard 20% or reduced rate 5%.

In order to confirm if a customer falls under end user or intermediary suppliers HMRC request that you receive written notification in the form:

• on paper and sent by post
• electronically in an email
• in a contract

The notification should be kept as part of normal business records and show clearly what supplies are covered. Contracts can be either for specific supplies or it can be a Heads of Agreement or call-off type contract for supplies that are to be made at some time in the future.

If a written notification is not made correctly the customer will be liable for accounting for the VAT that should have been charged under the reverse charge. It’s important that the person making the notification knows and understands that it’s correct.

An example of the wording to obtain for the written notification is:

‘We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.’

The below flowchart has been provided by HMRC to help determine whether the supply is DRC or normal VAT rules applies:  

Contractors – what do you need to do?
Life just got a little better for you, you should notice the difference of the scheme with a short term cashflow boost. If applicable, subcontractors will not be charging you VAT so you will not be paying it over to them when settling their invoice (everyone likes to hold on to their cash a little bit longer)!

The reverse charge will need to be used if you buy building and construction services when:

• payment for the supply is reported within the Construction Industry Scheme (CIS)
• the supply is standard or reduced rated
• are not hiring either staff or workers, or both
• you’re not using the end user or intermediary exclusions

If you receive a service subject to the reverse charge from subcontractors you’ll have to account for the VAT in your VAT Return and recover it simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.

If the criteria above is met – What you now need to do

1. Check if your supplier has a valid VAT number.
2. Tell your supplier if you’re an end user or intermediary supplier, as the reverse charge will not apply.
3. Find out how to account for the charge.

Once you’ve confirmed your accounting systems and software can account for the reverse charge, you’ll need to:

• make sure the invoice you receive is correct
• check the list of services that must use the reverse charge
• record the reverse charge on your VAT return and reclaim it in the usual way

The Reverse charge does not apply to any of the following supplies:

• Supplies of VAT exempt building and construction services
• Supplies that are not covered by the CIS, unless linked to such a supply
• Supplies of staff or workers

The Reverse charge does not apply to any of the following customers, you as a contractor to a subcontractor:

• A non-VAT registered customer
• ‘End users’ i.e. a VAT registered customer who is not intending to make further on-going supplies of construction
  • For reverse charge purposes consumers and final customers are called end users. They’re businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.
  • The reverse charge does not apply to supplies to end users where the end user tells their supplier or building contractor in writing that they’re an end user.
• ‘Intermediary suppliers’ who are connected e.g. a landlord and his tenant or two companies in the same group
• Overseas customers – it only applies to UK companies providing building and construction services in the UK

Telling your supplier (subcontractor) that you are an end user or intermediary supplier:
In order to confirm if you as a customer fall under end user or intermediary suppliers, HMRC request that you provide written notification in the form:

• on paper and sent by post
• electronically in an email
• in a contract

The notification should be kept as part of normal business records and show clearly what supplies are covered. Contracts can be either for specific supplies or it can be a Heads of Agreement or call-off type contract for supplies that are to be made at some time in the future.

If a written notification is not made correctly the customer (you) will be liable for accounting for the VAT that should have been charged under the reverse charge. It’s important that the person making the notification knows and understands that it’s correct.

An example of the wording to use for the written notification is:

‘We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.’

The subcontractor should report on their invoice to you what rate the reverse charge is applicable, please be aware this can be standard 20% or reduced rate 5% depending on the service and supply.

The below flowchart has been provided by HMRC to help determine whether the supply is DRC or normal VAT rules applies:

Are you using the Cash Accounting Scheme or Flat Rate Scheme?
You cannot use the VAT Cash Accounting Scheme for supplies of services that are subject to the reverse charge – VAT is due when a VAT invoice is issued (tax point) or the payment is received, whichever is earlier.

Reverse charge supplies are not to be accounted for under the Flat Rate Scheme. Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC and recover it simultaneously on the same VAT Return. Users of the Flat Rate Scheme will have to consider if it’s still beneficial to them bearing in mind that under the scheme they cannot recover VAT incurred on purchases of materials, overheads and so on.