VAT Reverse Charge

What is the VAT Reverse Charge and Why has it been brought in?

There are now new rules in relation to VAT for businesses who work under the Constriction Industry Scheme (CIS) and this article will hopefully explain why this has now changed and the actions you will need to take for your business.

From the 1st March 2021 anyone who is involved within the buildings industry who normally charge VAT will now fall within the new VAT Domestic reverse charge regime.

This has been introduced by HM Revenue and Customs to combat missing trader fraud within the construction industry.

VAT Reverse Charge

When does this apply?

This will apply to any construction activities that are defined as such under the CIS legislation which can be found here – the main exception being for that of professional services which is also included on the link.

If you are a supplier of construction services the new reverse charge will apply if:-

  • The customer is registered in the UK for VAT purposes
  • The work carried out would fall under the scope of the Construction Industry Scheme
  • For services supplied that would be supplied at the standard or reduced rate of VAT – Please note that this does not apply for zero rated services.
  • Customer has not given written confirmation that they are the end user or intermediary supplier
  • Check if the customer has a valid VAT number – you can use this link
  • Check your customer is registered for CIS
  • Review your work and notify them if the work falls under the reverse charge scheme
  • Ask client if they are an end user or an intermediary supplier

If the client is an end user then the reverse charge does not apply.

What do I do if I am in receipt of construction services?

If you are a customer who is buying construction services then the reserve charge will apply if the following applies:-

  • Payment for the supply is within the CIS scheme
  • The supply is at standard or reduced VAT rate
  • You are the invoicing the end user

What is an end user?

For reverse charge purposes consumers and final customers are called end users. They’re businesses, or groups of businesses, that are VAT and CIS registered but do not make onward supplies of the building and construction services supplied to them.

How do I account for this change on my invoices and my VAT return?

Sales invoices will now have to be completed using the domestic reverse charge VAT codes where these follow the rules above. The invoice MUST state that the customer is now responsible for accounting for the VAT and you can use the following wording “Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant VAT rate as shown above.”

Suppliers must not charge any output VAT on sales under the reverse charge scheme and this be reflected on the entries within the VAT return.

Please see below example of a sale of £6,000 (£5,000 net + £1,000 VAT) and how this would now be treated in the VAT return of a supplier of construction services (subcontractor) and a customer of construction services.

Supplier of construction services:

DetailPre 1 March 2021Post 1 March 2021
Box 1 – Output VAT1,0000
Box 3 – Total of box 1 & 21,0000
Box 4 – Input VAT00
Box 5 – Net of box 3 and box 41,0000
Box 7 – Net output5,0005,000

 

Customer of construction services

DetailPre 1 March 2021Post 1 March 2021
Box 1 – Output VAT01,000
Box 3 – Total of box 1 & 21,0001,000
Box 4 – Input VAT01,000
Box 5 – Net of box 3 and box 4(1,000)0
Box 7 – Net output5,0000

 

As you can see, this now moves the VAT on to the customer of construction services. This means that no VAT is due to be paid to HM Revenue and Customs until the customer of constructions invoices the end user.

So what’s next?

If you require any further information then you can find more information from HM Revenue and Customs here.

If you require any further clarification or need help in setting up your domestic reverse charge invoice then please do not hesitate to contact us. You can email your client manager, or give us a call today.

Bury – 01284 755956

Wymondham – 01953 438450

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