VAT Reverse Charge for the Construction Industry

It is estimated that VAT fraud within the construction industry costs HMRC £100m per year. In a bid to tackle this HMRC have made major changes to how VAT is accounted for by introducing the Domestic Reverse Charge. Theses new rules come into effect on the 1st March 2021

What is it?

Under current VAT rules each business is responsible for reporting and paying VAT to HMRC. From 1st March under the new scheme VAT will be reported and paid to HMRC by the main contractor and not the subcontractor.

Who does it affect?

The new rules apply to any VAT registered businesses who supply or receive services under the Construction Industry Scheme (CIS)

Full HMRC guidance on what services are included can be found here - https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340

When to apply the Reverse Charge?

Reverse charge must be used when all of the following criteria apply:

  • The services provided fall within the scope of CIS (see link to HMRC guidance above)
  • The VAT rate being charged is either 20% or 5%
  • The customer is VAT registered
  • The customer is registered for CIS
  • The customer is NOT the end user.

Example:

If Mr. Moor phoned your business directly and asked you to carry out some building work on his private home the reverse charge would not apply.

Why?

He is not registered for VAT or CIS and he is the end user.

However, if Builders R Us a main contractor (registered for VAT and CIS) who subcontracts work to your business called and asked you attend Mr. Moor’s house and carry out some building works for them then the reverse charge would apply.

Why?

The main contractor are both VAT and CIS registered and the customer is not the end user. In this instance the customer is Builders R Us but the end user is Mr. Moor.

To help you decide whether to apply the reverse charge we’ve included below a simple flow chart which you can follow to help you apply the correct VAT treatment.

How to show the Reverse Charge on your Invoice?

You will need to tell the customer that the reverse charge is being applied to the invoice and state the amount or rate of VAT that they need to account to HMRC. Do not include this figure in the amount payable by the customer.

Example wording you can include on your invoice

‘Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of the items marked ‘reverse charge’ at the relevant VAT rates above.’

If you use accounting software check for updates or new features and get familiar with them as they will likely have created new VAT codes or features to automate the correct treatment of reverse charge VAT.

How will it affect my VAT Returns?

If you’re using accounting software you won’t need to worry about which boxes in the VAT return to update for reverse charge because the software will do this automatically for you but we’ve included an example below explaining how it is accounted fir in the main contractor and subcontractors VAT returns

Example:

The subcontractor issues and invoice for £1000 and informs the main contract that they need to account to HMRC for reverse charge VAT at 20% or £200

Main contractor VAT Return

 

Under Normal VAT Rules

Reverse Charge Rules

Box 1 Output (Sales) VAT

No entry

£200

Box 4 Input (Purchase) VAT

£200

£200

Box 7 Total Purchases

£1000

£1000

 

Subcontractor VAT Return

 

Under Normal VAT Rules

Reverse Charge Rules

Box 1 Output (Sales) VAT

£200

No entry

Box 6 Total Sales

£1000

£1000

 


If you need any further help or guidance regarding the new reverse charge which comes into effect on 1st March 2021 then please contact us. We’ll be able to help and advise you on the changes and how they will affect your business.




VAT Reverse Charge Flow Chart1024_1jpg