Reverse Charge VAT for the Construction industry

From 1st March 2021 VAT is changing within the construction industry

It has been brought in to cut down on VAT fraud in the construction sector.

Who does it affect?

The new rules apply to contractors and subcontractors within the Construction Industry Scheme (CIS) who are VAT registered. Under the new rules when a subcontractor supplies services that fall within CIS to a contractor, who is not the end-user, the sub-contractor will no longer charge VAT. Instead, it will be the contractor’s responsibility to declare the input and output VAT on their VAT return.
VAT will only be charged to and paid by the end-user customer.
If you are not VAT registered it doesn’t apply to you!

What do you need to do?

Subcontractors

If you provide services that fall under CIS, you will need to:
Get a confirmation that your customer is an end-user, if they are then you will invoice with VAT as normal.
If customer is not an end-user then you will need confirmation from them and the reverse charge will apply. Both QuickBooks and Xero have specific VAT codes for this so make sure you select them.

From 1st of March you will need to inform customers that the reverse charge VAT has been applied and that they are responsible for declaring the VAT under the reverse charge mechanism.

An example of wording that could be used on the invoice is:

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.

An example invoice can be found here Sample invoice

You could set up a new Invoice template in your accounts software so the wording automatically appears.

Contractors

If you buy services that fall within CIS, you will need to speak to your subcontractors to confirm that you are a contractor and not an end user and therefore they will no longer charge you VAT.

Your subcontractors VAT will now need to be included on your VAT return – it goes in the sales and purchase VAT boxes so cancel each other out on the return so it won’t cost you anything! If we do your bookkeeping, we will deal with all of this for you. Just submit your paperwork as normal.
HMRC have produced useful flow charts to help decide if the reverse charge applies to a transaction:
Subcontractor flowchart
Contractor Flowchart

Links to detailed information the guidance from HMRC can be found below, it is quite long so be warned.
How to Use Domestic reverse charge
Domestic Reverse Charge Procedure (VAT notice 735)

As always we are here to help so if you have any questions please get in touch.

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