24th August 2020Reverse charge VAT on construction services

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:

• The services are supplied to an “end user”, such as a property owner or to a main contractor that sells or lets a newly completed building;
• An intermediary supplier connected or linked to an end user i.e. they share an interest in the same land where the construction works are taking place or are part of the same corporate group;
• The recipient is not VAT registered;
• The recipient is not registered for the CIS; or
• The supplies are zero-rated.

The Changes

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.

Example

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.

Getting Ready

What you need to do if you are a CIS and VAT registered business:

• Review supplies received from, or made to, other CIS and VAT registered contractors to consider whether they will be subject to the reverse charge from 1st March 2021.
• Establish the status of relevant customers to determine whether they are an “end user” or VAT registered with CIS status.
• Adapt your invoicing templates so new reverse charge invoices can be issued from 1st March 2021.
• Ensure that your VAT accounting system can deal with reverse charges, as appropriate.

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.