On 1 March 2021 HMRC introduced a VAT Domestic Reverse Charge Scheme. The rules and requirements for reporting, paying and reclaiming VAT under this scheme are not straightforward however we have attempted to summarise them below.
1. When does the VAT reverse charge for construction services apply?
It applies only to VAT-registered businesses who are supplying/receiving services that are reported under CIS.
There are 5 key questions to ask – if the answer to the first four questions is ‘yes’ and ‘no’ to the final question, the reverse charge will apply and no VAT will be charged on sales invoices raised for the job in question, and the customer should account for VAT instead.
a) Is the customer registered for the Construction Industry Scheme (CIS)?
If the answer to this question is ‘no’ you don’t need to worry about the reverse charge rules any further for this customer and can just adopt normal VAT accounting from 1 March 2021
b) Is the customer registered for VAT?
This can be confirmed using HMRC’s new VAT number checker service.
The worst-case scenario is for a builder not to charge VAT on a job that should have been subject to normal VAT rules, and HMRC raises an assessment for underpaid output tax.
c) Is the work within the scope of the CIS?
Traditional building services are obviously all included under the CIS, such as electricians, plumbers, bricklayers, decorators, carpenters etc. If in doubt, refer to the useful HMRC guidance on the CIS.
d) Is the work subject to either 5% or 20% VAT?
Any zero-rated sales are excluded from the new DRC regime, eg construction work on new dwellings.
e) Is the customer an end user or intermediary supplier for the work?
The DRC only applies if the customer makes an onward supply of construction services to their own customer: ie the typical subcontractor, contractor and customer arrangement. In cases where the contractor is not supplying on the construction services, the work is excluded from the reverse charge.
This can happen where:
The customer is an ‘end user’
This would be relevant if, for example, a bricklayer carried out work at the head office of his builder customer, or perhaps at a property that the customer owns and rents out. In other words, the service is not supplied on by the builder receiving the bricklayer’s services. The onus is on the customer to tell the bricklayer if it is an ‘end user’ for any job. If so, VAT will be charge in the normal way by the bricklayer.
The customer is an ‘intermediary supplier’
This is a business that is registered for both CIS and VAT that is connected or linked to end users. The connection is based on s1161, Companies Act 2006 (ie, the two entities are in the same corporate group or undertaking).
A link exists if both the intermediary supplier and the end user have a relevant interest in the same land where the work is taking place (eg, a landlord and tenant arrangement). So, even though the intermediary supplier is making an onward supply of construction services to the end user, the supplies it receives from other builders will be subject to normal VAT rules rather than the reverse charge.
6. 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, 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. Your invoice should still show all the usual information required for a VAT invoice but in addition they should clearly indicate that reverse charge applies using the correct terminology as follows:
- A note to confirm that the customer must deal with the VAT, along the lines of: “Reverse charge: Customer to pay the VAT to HMRC”
- Either the amount of VAT that the customer will declare as the reverse charge or at least the rate of VAT for the work in question.
You may also experience 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.
7. 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, it means you need to ensure that when you receive reverse charge VAT invoices you correctly account for them.
You 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.
8. 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.