The new VAT reverse charge for construction services comes into force on 1st March 2021. It applies to certain supplies of construction services by construction businesses to other construction businesses where both are part of the Construction Industry Scheme (CIS). The measure is aimed at tackling missing trader fraud within the construction sector but will have a big impact on VAT accounting for businesses affected.
The reverse charge will not apply if:
Under the new system, where a construction business supplies a service to another construction business, which would normally be subject to VAT at 20% or the reduced rate at 5%, it must NOT charge any VAT. The recipient of the services must then charge itself VAT and can then recover this VAT as input tax, subject to the normal rules.
So, for example, a sub-contractor builds a brick wall for another contractor and charges £1,000 for that service. From 1st March 2021, the sub-contractor issues an invoice for £1,000 with no VAT and the following wording: “reverse charge: customer pays the VAT to HMRC”. On receipt of this invoice the contractor charges himself £200 VAT (£1,000 x 20%) and pays this to HMRC in Box 1 of his VAT Return. At the same time, he may recover £200 VAT as input VAT in Box 4 of his VAT Return and records the net value of the purchase in Box 7.
What you need to do if you are a CIS and VAT registered business:
It should be noted that any VAT incorrectly charged by construction businesses after 1st March 2021 will not be recoverable by the recipient.
Please get in touch if you have any questions.