Reverse charge VAT in the construction sector
Written by Ray Coman
It is a requirement for the client to account for VAT rather than the supplier.
A subcontractor is no longer liable for VAT; instead the contractor is liable for VAT.
The domestic reverse charge VAT will be introduced from 1 March 2021. The measure was due to be introduced on 1 October 2019 but it was delayed due to Brexit and Covid.
CIS subcontractors, who are VAT registered no longer collect VAT where their client:
Clients who are ‘end users’ and has written to the subcontractor to confirm that they are end users are not required to reverse charge. A normal Vat invoice should be sent to end users.
CIS contractors will have to change the way that a VAT Return is prepared, as explained below.
An end user is the consumer of the services and not the intermediary. For instance, a property owner commissioning work done on his or her property can write to the supplier to confirm that they are an end user and should therefore be sent a VAT invoice. A building firm is not usually an end user. Therefore, the building firm will be required to account for VAT under the reverse charge rules. A council, local authority or other government agency will usually be an end user. If a statement is provided by this type of customer then the reverse charge does not apply.
If Vat registered, the safest method is to issue a VAT invoice. If the client demonstrates that he or she is VAT registered and CIS registered, then it is no longer a requirement to charge VAT. A practical approach would be to charge VAT and wait for the client to prove to the contrary. The onus should be on the client to demonstrate that they are an end user.
A CIS contractor (the client of the subcontractor) is required to report both the input and the output VAT on its VAT Return. When the CIS contractor receives a bill from the subcontractor, VAT is added to that bill and also recovered from that bill.
Subcontractors no longer report reverse charge VAT on the VAT Returns. However, a VAT registered business is still required to account for VAT. Since VAT can be reclaimed on outgoings, many subcontractors will be due a VAT refund following the filing of VAT Returns. To help cashflows, a trader could switch to monthly VAT Returns to receive any VAT refunds more quickly and regularly.
Before the changes, a VAT registered subcontractor would receive pay including VAT. Once every three months the VAT would be paid over to HMRC. Before the changes, the subcontractor would have more cash for the period between receiving VAT and paying it over to HMRC. Since the changes, a subcontractor will not have this temporary increase in cashflow.
There is no output VAT to report. Therefore box 1 of the VAT Return will not be affected by any reverse charge supplies. The net value of the sale, i.e. the value excluding VAT is entered into box 6. VAT collected for services which are not subject to the reverse charge are entered into box 1.
Vat on outgoings such as tools, materials and administrative costs should be entered into box 4 as usual. The VAT exclusive amount of purchases are entered into box 7.
A contractor should add Vat to the invoice provided by the subcontractor. This VAT amount is added to box 1 of the VAT Return. The VAT exclusive amount is added to box 6. The exact same VAT is also added to box 4 (as input tax) and the Vat exclusive amount to box 7.
Once the VAT has been added and the exact same amount taken away, there will no difference to VAT payable on the VAT Return of the contractor.
It is no longer possible to use cash accounting, meaning that if an invoice is received before payment is made, VAT has to be accounted for from an earlier date.
It is a requirement to show the rate of VAT that applies and a note that the reverse charge applies to the invoice. However, the VAT amount is not included in the invoice. For instance, the amount excluding VAT (net) and amount including VAT (gross) are both shown on the invoice, even though these are the same amount. The VAT percentage is shown. This will usually be 20%. The following question covers reduced rate supplies. Zero rate supplies are not subject to the reverse charge. The VAT invoice should include a statement that the reverse charge applies.
VAT is not added to the invoice issued by the subcontractor, where teh reverse charge applies. Most construction services are standard rated, i.e. 20%. A reduced rate of 5% applies to construction on certain renovations including: renovating a home that has been empty for two years, converting a commercial property into a home and changing the number of dwellings in a building. However, certain new builds are zero rated for VAT purposes. The reverse charge is not used for zero rated supplies.
The Flat Rate Scheme is discouraged for reverse charge construction firms subject to the reverse charge. The amount due to HMRC is a percentage of VAT inclusive income. Since ‘income’ includes what has been charged by subcontractors, a contractor could end up paying more VAT than they have received. The Flat Rate Scheme would also be a pitfall for a subcontractor, who could end up paying VAT rather than receiving a refund. The flat rate scheme has to be applied for and therefore if a trader is not on the scheme, there is no action to take.
Construction supplies that are not part of Construction Industry Scheme. Services provided to a private householder are not in the construction industry scheme. Services provided to a foreman or construction firm are in the construction industry scheme.
Typical trades of building are construction services. Examples include providing the service of building, decorating, plumbing, heating, and electrical systems. However, interior design, engineering, architecture, surveying or professional support to the construction sector are not for the purpose of CIS, construction. Installation of blinds, artwork, advertising, fire alarms and security systems, manufacture of components and drilling and mineral extraction are not construction for this purpose. The supply of materials is not a construction service under these regulations. Providing staff to the construction industry is also exempt from the reverse charge. Equipment Hire is outside of CIS and the reverse charge.
The statutory instrument was introduced to tackle ‘missing trader fraud’, in which shell companies would be set up to invoice a client but with no plan to pay HMRC for the VAT received. Since the practice was prevalent in the construction industry the new reverse charge rules are targeted at that sector.
We can advise on VAT. We provide a VAT Return preparation service and can review invoices for compliance purposes. We provide accounting software at competitive prices. We offer a range of accounting and tax services, including preparing accounts and Tax Returns so all accounting and advice is dealt with in the same place.