The New VAT Reverse Charge for CIS - The Countdown Is On
Updated: Jan 15
Update: This blog was updated in January 2021.
From 1 March 2021 HMRC are introducing a domestic reverse charge which will apply exclusively to certain building and construction services. This is part of their efforts to tackle fraud in the construction industry totalling millions of pounds each year. It will mean the customer will be liable to account for the VAT during purchases, in place of the supplier.
These changes could impact 150,000 small and medium businesses in the UK's construction sector. Read on to find out if you are affected and how to prepare to make sure you don't get caught out.
VAT reverse charge: the key facts
For years, suppliers have accounted for their own VAT, taking VAT payments from their customers before forwarding these onto HMRC.
The reverse charge initiative will see main contractors charge themselves VAT on subcontractors' services. The VAT that they would have paid to the subcontractor will be passed directly to HMRC in their own VAT returns.
Does this affect me?
The reverse charge will only apply to certain construction services to businesses within the construction sector.
This includes, but it not limited to:
- The installation of heating, ventilation and air-conditioning
- Painting or decorating
- Construction, renovation and demolition of structures
Supplies that are excluded:
- Professional work of surveyors, architects or consultants
- Machinery, drilling or extraction
- Installation of security systems
For a full list of which service are and aren't included, take a look here.
What can I do to prepare?
As a subcontractor:
You will need to verify that the contractor is VAT registered. This can be confirmed using HMRC’s new VAT number checker service. I recommend it is used by builders as a matter of course.
Once you have confirmation, you should issue VAT reverse charge invoices which state that the services you have provided are subject to the domestic reverse VAT rules. This only applies to supplies at 5% and 20% zero rated supplies are not included in this new regime.
You won't have to receive VAT to pass onto HMRC through your VAT returns and the responsibility passes on to the contractor (your customer).
After determining whether your services are included in the list of specified services in CIS. You will then most likely need to review your invoicing systems. Think as well, about the impact these changes will have on your cash flow.
As a contractor:
You will need to pay the subcontractor exclusive of VAT and account for the VAT that would have been due as per the normal tax rates.
Details that you require will be included on the invoice that you receive. Via the reverse charge rules, you will then need to charge the subcontractors' VAT and apply it to your VAT return.
You will need to tell subcontractors whether or not you are at the end of supply chains. Then consider putting in place systems to account for the reverse charge VAT invoices and prepare to report the numbers to HMRC.
There are two helpful flowcharts in HMRC’s comprehensive guidance on the new rules and when they apply – one is for suppliers and one is for buyers. It is worth downloading them and having them to hand when you are reviewing invoicing. Click here to take a look.
Contact us if you would like to discuss any of the changes in more detail. Give us a call on 01423 431889 or email firstname.lastname@example.org.