Domestic VAT Reverse Charge for Construction
The Domestic VAT Reverse Charge for Building and Construction Services comes into effect on Monday 1st March 2021. It was original due to start in October 2019 but has been delayed twice due to Brexit and COVID19. The Domestic Reverse Charge is being introduced to reduce VAT fraud in the construction industry.
Where the reverse charge applies, customers - not suppliers - account to HMRC for the VAT due. This means customers pay the VAT directly to HMRC instead of the suppliers.
The reverse charge only applies if both:
The supplier and the customer are registered for VAT
The payments have to be reported through CIS.
Other points about the reverse charge:
The reverse charge applies if the VAT tax point is on or after 1st March 2021.
The reverse charge applies to standard and reduced-rate VAT services. It does not apply to Zero rated services.
The reverse charge applies to ‘specified construction services’ based on the list of construction operations for CIS. Therefore if a construction service is not eligible for CIS it will not be subject to the reverse charge. Certain services can become included:
If there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge.
If there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
The contractor is asked to consider all construction contracts with a sub-contractor. If they can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.
There are some exceptions where the reverse charge may not apply including:
Supply to end users, i.e. a VAT registered customer who is not intending to make further on-going supplies of construction
Supplies to ‘intermediary suppliers’ who are connected, e.g. a landlord and his tenant or two companies in the same group.
Labour-only supplies by employment businesses
It is up to the end user/Intermediary supplier receiving the services to tell their suppliers in writing if they are an end user or intermediary supplier for the work in question.
FLOWCHART
I’m a contractor, what does the VAT reverse charge for construction services mean for my business?
If you’re a contractor (i.e. purchase CIS regulated construction services) then, in theory, 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, but could not reclaim until your next VAT return, 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.
I’m a sub-contractor, what does the VAT reverse charge for construction services mean for my business?
If you’re a sub-contractor (i.e. you supply CIS-regulated construction services) 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 monthly/quarterly to HMRC as a payment will no longer be available for any uses you might have put it to.
Notably, because you no longer pay VAT on your sales you might find you become what HMRC calls a repayment trader—a business whose VAT Return means they claim money from HRMC, rather than making a payment.
For both scenario’s the impact on the business will depend on how much ‘CIS DRC’ business you have.
If you currently use the flat rate VAT scheme it is important to note that Reverse Charge supplies are excluded from the flat rate scheme so should be accounted for and reported the same way that transactions are accounted for and reported under the standard scheme. It may be worth considering whether the flat rate scheme is still the most beneficial scheme for you as this will reduce the amount of turnover that is used as a basis for reclaiming VAT under the flat rate scheme.
You can read more about the Domestic Reverse Charge for Construction on HMRC’s Website.