VAT Reverse Charge for Construction Sector
Helen Fraser, Tax Adviser

A new domestic reverse charge is being introduced to the UK for the construction sector and this takes effect for invoices raised from 1 March 2021.  This was originally pushed back from 1 October 2019 and 1 October 2020.

The reverse charge was introduced to counter fraud in the construction sector.

When does the reverse charge apply?

This will apply to supplies between contractors of construction services where the contractors are both:

  • CIS registered and are required to report payments via CIS (Construction Industry Scheme) and
  • VAT registered and the supply of services are liable to VAT at the standard or reduced rate

The reverse charge only affects ‘specified supplies’ made between VAT registered businesses.

If your invoice consists of some CIS and some non-CIS supplies, your whole supply will be subject to the reverse charge

It will not apply when invoicing the “end user” (see below).

How does the reverse charge work?

Normally, sub-contractors / contractors who supply construction services will charge VAT and this is included in their invoice to the customer.  The output VAT charged is then reported and paid to HMRC via the VAT return.

Instead, where these rules apply, the sub-contractor / contractor should notify the customer that the supply is subject to the reverse charge and the customer should instead account for the output VAT.

This means the customer will account for the output tax (in box 1 of the VAT return) as well as claiming the input tax (in box 4 of the VAT return).

This could bring a cash flow benefit to the customer receiving the supply as the amount payable to the contractor/supplier would be less – assuming that the due date for payment to the contractor arises before the date that the VAT is due for payment.

If you are charging construction services to a customer who is not VAT and CIS registered, you should continue to charge VAT in the normal way and not according to the reverse charge rules mentioned above.

End users are those who hold an interest in the land and are receiving building and construction services but do not supply those services on along with other services, for example a landlord or a developer etc.  The reverse charge does not apply to supplies to end users where the end user tells their supplier or building contractor in writing that they’re an end user.  If the end user does not provide its supplier with confirmation of its end user status, it will still be responsible for accounting for the reverse charge.

What will I need to do as the supplier making the supply?

Drafting the invoice

The invoice you provide should include all the statutory information which is normally required for a VAT invoice.  You should also annotate on the invoice that the domestic reverse charge applies and the customer is required to account for the VAT.  The amount of VAT due should be shown on the invoice, however this should not be included as ‘VAT charged’ and it should not be included within the amount payable to you as the supplier.

Preparing the VAT return

As the supplier making the supply, you should not enter anything in box 1 of the VAT return, however you must record the net sale in box 6.

If you are using an accounting system, you should ensure that the correct tax code is used so that the transaction falls into the correct boxes.

What will I need to do as the customer receiving the supply?

Preparing the VAT return

As the customer receiving the supply, you should account for the output VAT in box 1 of the VAT return, however nothing should be entered in box 6.  You should also reclaim the input VAT as normal via box 4 of the VAT return and the net purchase figure should be entered into box 7.

If you are using an accounting system, you should ensure that the correct tax code is used so that the transaction falls into the correct boxes.

Other points to note

We expect HMRC to have a soft landing period for penalties for non-compliance.  It should be noted that if the reverse charge is not applied when it should be (i.e. the supplier incorrectly charges VAT to its customer), HMRC could ask the customer to pay the additional VAT, even if this has already been paid to the supplier and the supplier has accounted for it and paid this to HMRC!

If you have any further queries about the reverse charge or would like to know more, please contact our specialist tax team on 01202 717867 or email info@inspire.uk.net

 

 

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