24th February 2021

Domestic Reverse Charge VAT for Construction- it will be here on 1 March 2021

After much delay, from 1 March 2021 the domestic VAT domestic reverse charge must be used for most supplies of building and construction services.

The charge applies to standard and reduced-rate VAT services:

  • for individuals or businesses who are registered for VAT in the UK
  • reported within the Construction Industry Scheme

The effect of the change means that it is the customer who is buying the services (contractor) receiving the supply of specified construction services who must account for the VAT due rather than the supplier who is selling services (subcontractor).

Simply put- the subcontractor no longer adds VAT to their invoices and the contractor  no longer pays it to subcontractor. The contractor shows a ‘would be’ VAT charge as both input and output meaning no net tax is payable to HMRC in most cases. The change applies to standard and reduced-rated supplies of building and construction services made to VAT-registered businesses, who in turn also make onward supplies of those building and construction services. Landlords, property developers and tenants, are exempt because of the End User exemption i.e they sell the completed properties rather than make an onward supply of the construction services.

If you are a VAT-registered subcontractor (supplier) who provides building and construction services to a VAT-registered contractor (customer) who is CIS-registered then you no longer need to account for the VAT. Instead, your invoice should inform your customer that:

  1. the VAT domestic reverse charge is applied; and
  2. they are responsible for the VAT using the domestic reverse charge procedure.

If you are a VAT-registered contractor you will account for both input and output tax on invoices you receive from your VAT-registered subcontractor.

This change may have an effect on your cashflow.

If the VAT domestic reverse charge does not apply you should follow the normal VAT rules.

It is important that if the reverse charge applies to any invoice then any VAT charged in error will not be properly charged. As such, the VAT is irrecoverable. Any customers paying VAT not properly charged will not be able to recover it as input tax.

Some Practical Examples

See Top 5 queries regarding the new VAT Construction Domestic Reverse Charge from Croner TaxWise for some answers to common questions.

How to prepare

  1. Make sure your accounting software can deal with the reverse charge.
  2. Consider the impact on your cash flow, but essentially consider monthly VAT returns to mitigate this issue.
  3. Communicate with your staff, contractors and/or customers.
  4. See our To Do Lists below.
  5. Read more detailed guidance about the reverse charge.
  6. Watch HMRC online webinars to get help and support for VAT.

Sub-contractor To Do List

  1. Check if your customer has a valid VAT number.
  2. Check your customer’s CIS registration.
  3. Review your contracts to decide if the reverse charge will apply, and tell your customers that you will be applying the reverse charge from 1 March 2021.
  4. Ask your customer to confirm whether they are an end user or intermediary supplier.
  5. Find out if your accounting software can record the reverse charge
  6. Make sure your invoices show the reverse charge applies, so customers will no longer pay you any VAT

Contractor To Do List

  1. Check if your supplier has a valid VAT number.
  2. Tell your supplier if you’re an end user or intermediary supplier, as the reverse charge will not apply.
  3. Check your accounting software can record the reverse charge
  4. Make sure the invoice you receive is correct. Do not pay any VAT unless you are sure the normal VAT rules apply.
  5. Check the list of services that must use the reverse charge
  6. Record the reverse charge on your VAT return and reclaim it in the usual way

Finally, please do speak to The Revel Team on 01428 555100 if you have any questions or queries. This is just a simple overview of a complex issue that may have a very real effect on your cashflow.