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VAT Reverse Charge

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 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 the 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 even simpler 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.

It applies only to VAT-registered businesses who are supplying/receiving services that are reported under CIS.

In other words, it applies to services supplied between the majority of construction sub-contractors and contractors in the UK.

When CIS business is the recipient of construction services

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.

Crucially, reverse charges do not contribute to a company’s potential VAT threshold. So if you aren’t registered for VAT then any attempt to apply the reverse charge will not push you over the limit.

Notably, the reverse charge also doesn’t apply to end users, such as the people who use a building that’s been constructed by the provided services, and nor does it apply to some of those connected to them, such as landlords or tenants.

For sake of clarity, 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?
  • 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.
  • You will, however, need to expect a change to the way your reconcile customer’s payments against invoices issued, as any VAT registered customers will be withholding the VAT element for any CIS related supplies.
  • This may require an update to your accounting software if you do not use cloud software.
  • It might also 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 HMRC, rather than making a payment.
  • HMRC suggests that such businesses apply to move to monthly returns, to speed up payments received from HMRC and therefore benefit cash flow.
  • When it comes to completing 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.
  • 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.
  • This may require an update to your accounting software if you do not use cloud software.
  • 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, make sure the invoice you receive is correct, especially with regard to the correct VAT rates, and ensure the services listed are eligible for the reverse charge.
  • When it comes to your VAT return, 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 reclaim the 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.
  • 12. Does the VAT reverse charge for construction services apply to work provided for home/domestic users?
  • No. It only applies to VAT-registered businesses registered for the CIS.
  • If the services are provided for non-VAT-registered individuals or other kinds of ordinary non-business individuals then standard VAT rules apply.

Invoices

Invoices should clearly indicate the reverse charge applies using the correct terminology. HMRC suggests businesses use any of the following:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC

It should be clear on the invoice that the reverse charge mechanism has been applied.

You invoice should still show all the usual information required for a VAT invoice.

Reverse Charge VAT and Accounting Software

Within your accounting software, it makes sense to create new invoice templates for use with reverse charge supplies, with all the information above listed as standard.

However, you may find that your accounting software includes functionality to account for the VAT reverse charge for construction and will therefore output the correct type of invoice.

Although, note that the construction industry VAT reverse charge is just one of several VAT domestic reverse charge procedures and each one has different rules.

Reverse charge supplies are excluded from the flat rate scheme so should be accounted for and reports the same way that transactions are accounted for and reported under the standard scheme.

This will reduce the amount of turnover that is used as a basis for reclaiming VAT under the flat rate scheme and sub-contractors may want to discuss this with their professional adviser to reassess which of the standard or flat rate schemes are most beneficial.

As an example, the table below explains how an invoice for a £100 service that is for standard rate VAT should be reported in the next VAT return.

Please note this is guidance and relevant if you are VAT Registered and working within CIS, please contact AJR & Co Ltd to discuss your circumstances.