VAT domestic reverse charge for building and construction services

As of 1 October 2019, those working in the UK’s construction industry might have to handle and pay VAT in a different way following the introduction of the new VAT reverse charge system.

What is the VAT domestic reverse charge for construction services?

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

The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions between VAT-registered contractors and sub-contractors who are registered for the CIS.

The scheme means that those supplying construction services to a VAT-registered customer will no longer have to account for the VAT.  In simple terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.

The payment received will be for the cost of the work done (plus materials used) and it applies to both standard and reduced-rate VAT supplies. It doesn’t apply to zero-rated supplies.

Who does the VAT reverse charge for construction services apply to?

It applies only to VAT-registered businesses who are registered with the CIS, and use the CIS to report payments.

If your CIS business is the recipient of construction services, and receives an invoice with the reverse charge applied, then you account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.

If your business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply for the supplier (so they will charge you the VAT and account for it as usual). If you’re not VAT registered, you should make it clear to the supplier in writing.

HMRC says the VAT reverse charge for construction doesn’t apply to sub-contractors unless the answer to all of the following questions is positive:

  • Are any of the supplies you are making within the scope of the CIS?
  • Is the supply standard or reduced-rated?
  • Is your customer VAT registered?
  • Will your payment be reported under CIS?
  • Are you sure the customer is not an end user?

Sub-contractors

If you’re a sub-contractor then, in theory, it means very little because when you issue your VAT invoice you will merely be passing on the VAT charge that you would have had to account for in any event.

But it might affect your cash flow because the VAT you previously held before passing it HMRC as a payment will no longer be available for any uses you might have put it to.

In addition, because you no longer pay VAT on your sales you might find you are reclaiming VAT back from HMRC, rather than making a payment. You may wish to consider moving to monthly VAT Returns in that case.

Contractors

If you’re a contractor (i.e. purchase CIS regulated construction services) then it means you need to ensure that when you receive reverse charge VAT invoices you correctly account for them.

You may gain a cash flow benefit because the VAT you previously had to pay when paying sub-contractors is simply netted off in your VAT return. There should be no net impact on your overall VAT bill.

However, to ensure you don’t pay too much or too little VAT you will need to ensure the invoice you receive is correct, especially with regard to the correct VAT rates, and you’ll need to ensure the services listed are eligible for the reverse charge.

Example

Old rules

A sub-contractor invoices a contractor for £1,000 + VAT = £1,200 for qualifying services.

The contractor would pay the full £1,200 and claim input (purchase) VAT of £200 and the sub-contractor would declare output (sales) VAT of £200 on their respective VAT Returns. Note: Normal CIS deductions apply.

New rules

The sub-contractor will send an invoice for £1,000 to the contractor.  The invoice will still need to show the VAT which should be paid to HMRC but the VAT will not be declared on their VAT Return.

The contractor will pay £1,000 to sub-contractor.  The contractor will declare £200 of VAT on their own VAT Return as output VAT.  The contractor will also claim the £200 input VAT in the same way as normal. NOTE: Normal CIS deductions will still apply.

 

 

Transactions not under reverse charge

Transactions under reverse charge

 

Flat Rate Scheme

Standard Scheme

Flat Rate Scheme

Standard Scheme

Sub-contractor

Box 1: FR% applied to £1,200

Box 1: £200

Box 6: £1,000

Box 6: £1,000

Box 6: £1,000

Contractor

n/a

Box 4: £200

Box 7: £1,000

Box 1: £200

Box 4: £200

Box 7 £1,000

Box 1: £200

Box 4: £200

Box 7 £1,000