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October 14th 2020

VAT domestic reverse charge on construction services

The VAT domestic reverse charge, originally slated for October 2019 but repeatedly delayed, should finally come into effect from 1 March 2021.

The charge will affect many businesses operating in the construction sector, as summarised below.

If you supply building and construction services

You must use the reverse charge from 1 March 2021 if you’re VAT registered in the UK, supplying building and construction industry services and:

  • your customer is UK VAT registered;
  • your supply is standard or reduced rated;
  • the supply is reported under the Construction Industry Scheme (CIS);
  • you’re not an employment business supplying staff or workers; and
  • your customer has not given written confirmation that they are an end user or intermediary supplier.

Where the reverse charge applies, VAT is not charged to your customer; your customer instead accounts for the VAT using the reverse charge procedure.

For some subcontractors the new rules are likely to create cash flow problems. Some may benefit from switching to monthly VAT returns in order to recover purchase VAT more promptly.

If you buy building and construction services

You must use the reverse charge from 1 March 2021 if you’re VAT registered in the UK, buying business and construction industry services and:

  • the supply is standard or reduced rated;
  • the supply is reported under the Construction Industry Scheme (CIS);
  • you’re not hiring staff or workers; and
  • you’re not an end user or intermediary supplier.

Where the reverse charge applies, you’ll need to account for the VAT using the reverse charge procedure. Some main contractors may benefit from the new rules since there will no longer be a requirement to pay VAT to subcontractors in respect of supplies that are subject to the reverse charge.

Example

A VAT registered subcontractor makes a supply of building services to a main contractor, who is building a new commercial property for an end user.

Under the current rules the subcontractor would charge the contractor £50,000 plus £10,000 VAT (at the standard rate of 20%).

Under the domestic reverse charge, the subcontractor would invoice the main contractor £50,000 only (i.e. no VAT). The invoice will state “the CIS reverse charge applies”.

The main contractor will pay the subcontractor £50,000; and account for £10,000 of output VAT - as well as input VAT - on its own VAT return.

Where previously the subcontractor might have enjoyed the cash flow benefit of having the extra £10,000 in its own bank account for a period of time, this benefit is now lost. By contrast, under the new rules the main contractor now has to pay the subcontractor only £50,000 as opposed to £60,000, and he may therefore enjoy a cash flow benefit under the new rules.

The main contractor will in turn have to consider whether the reverse charge applies to his supplies to the end user.

For further information and advice concerning the VAT domestic reverse charge, contact us today.

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