As of 1 March 2021, 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 for building and construction services, to give it its full title, is a change in how VAT is handled for certain kinds of construction services in the UK, along with the building and construction materials used directly in those services (although it doesn't apply to building and construction materials supplied separately and independently of any construction services). The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors. The scheme means that those supplying construction services to a VAT-registered customer will no longer have to account for VAT. Instead, the customer will account for the VAT (that is, it will be considered input tax for them, as if they've made the supply to themselves). 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), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice. When is this due to be introduced? There has already been a number of extensions to the introduction date of this new scheme but HMRC have confirmed it will be in place to start from 1 March 2021. What if my construction project begins before the reverse charge but ends after it comes in? It will depend on when the tax-point is. In most cases, this will be the date of the issue of the VAT invoice, or the receipt of the payment, whichever occurs first. However, if a prepayment was made then it will be the date the supplier received payment and if there is no invoice or the invoice was issued 15 or more days before the work is finished then it will be the date that the work was finished. This is known as the Time of Supply rules. If the tax point is on or after 1 March 2021 then the reverse charge should be applied. If the tax point is before that date, current VAT rules apply. What VAT rates does the VAT reverse charge for construction services apply to? It applies to both standard and reduced-rate VAT supplies. It doesn't apply to zero-rated supplied.
What does this mean for sub-contractors?
If you are 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. You will however need to expect a change to the way you reconcile customer payments against invoices issued, as any VAT registered customers will be withholding the VAT element for any CIS related supplies. When it comes to your VAT return, you must not enter in box 1 of the VAT return any output tax on sales to which the domestic reverse charge applies. But you must enter the value of such sales in box 6. What does this mean for contactors? 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'll need to pay any VAT due directly to HMRC as part of your normal VAT settlement process instead of paying the VAT on CIS related supplies to your supplier. In your VAT returns, enter in box 1 of the VAT return the output tax on purchases to which the domestic reverse charge applies. But do not enter the value of such purchases in box 6. You may also reclaim any input tax on your domestic reverse charge purchases in box 4 of the VAT return and include the value of the purchases in box 7, in the normal way. Should invoices change when the VAT reverse charge for construction comes in? Yes, invoices should clearly indicate the reverse charge applies using the correct terminology such as Reverse Charge: VAT Act 1994 Section 55A applies, Reverse Charge: S55A VAT 94 Applies, Reverse Charge: Customer to pay the VAT to HMRC. Please make sure it is clear on the invoice that the reverse charge mechanism has been applied.
For more information, please visit https://www.gov.uk/guidance/vat-reverse-charge-technical-guide or contact us directly.