Construction Industry VAT Reverse Charge

From   1st March 2021, Contractors will pay VAT due directly to HMRC, rather than to a business. As a supplier or subcontractor, it is important to understand the changes and the repercussions they may have on compliance with the regulations and on cash flow.

The VAT domestic reverse charge for services is a change in how VAT is handled for certain types of construction services in the UK.

The scheme means that those supplying construction services to a VAT register customer will no longer have to account for VAT. Instead, the customer will account for the VAT. The customer will pay and reclaim the VAT at the same time.

In practical terms, for services they provide, sub-contractors will require the contractor, employing them to handle and pay the VAT to HMRC.

Key Points

Exclusions:

The legislation does not apply to:

• The supply of solely goods
• Zero-rated supplies of construction services

If the invoice is for services that fall within the CIS (both labour and materials) then the reverse charge applies – even if the sub-contractor is not registered for the CIS.

The change only applies to individuals or businesses that are registered for VAT in the UK .

It will not apply to end users,individuals, if the service is zero rated or if a sub-contractor is not registered for VAT.

The reverse charge may also mean your business will make net repayment claims to HMRC, as you no longer receive VAT on your sales. You can apply to move to monthly returns using your online VAT account.

Sub-contractors

If you are a sub-contractor you should be aware that your customers will no longer be paying you VAT, which will reduce the gross value of payments coming into your business.

What is the 5% disregard for VAT reverse charge?

A general list of the work that does fall under the CIS, and the work that doesn’t, can be found on the government’s website.

Exception

If the component of the invoice for work that falls under the CIS VAT reverse charge rules is just 5% or less of the total amount invoiced, then the normal VAT rules are applied, and the CIS VAT reverse charge is not use.

What do you need to do?

Sub-contractors

At the moment you add VAT at 20% to your Sales Invoices and from the 1^st of March 2021 if you issue an Invoice to a contractor in the construction industry you no longer add VAT. Instead, you must state on the Invoice, what the VAT amount or Rate should have been and that the Invoice falls with the reverse charge rules.

Our Advise

If you are a contractor make sure you write to sub-contractors to let them know about the changes. Similarly, if you are a sub-contractor, you should start writing to customers to determine VAT treatment on sales.

Where to get detailed information and HMRC guidance

HMRC website has now issued revised guidance. The technical guide has a list of contents covering specific areas which may be relevant to your circumstances.  

Attached you can find a flowchart to see how you would decide whether to apply normal VAT rules or apply the domestic reverse charge.

For further information and an overview of reverse charge accounting, visit the HMRC website.