REVERSE VAT CHARGE FOR CONTRACTORS
The VAT domestic reverse charge for building and construction services is an upcoming change in how VAT is handled for certain kinds of construction services in the UK.
The VAT reverse charge for construction is effectively an extension of the CIS scheme and applies only to transactions that are reported under the CIS scheme and are between VAT-registered contractors and subcontractors.
It essence it means subcontractors will no longer have to account for the VAT for work done as part of the CIS. Instead, the contractor will account for the VAT.
However, subcontractors still have responsibilities around VAT, such as identifying relevant reverse charge transactions and documenting them on the invoice.
This has all come about as HMRC want to stamp out tax avoidance by subcontractors who collect VAT but then disappear without paying it.
The new VAT domestic reverse charge for construction begins on 1 March 2021.
The main points are:
- The contractor will no longer pay the VAT element of a subcontractors invoice, instead they will include this on their own VAT return and pay it over to HMRC.
- This new system is aimed at subcontractors invoices that are eligible for a CIS deduction and would normally have VAT added to it ie the subcontractor is VAT registered
- The subcontractor should not add VAT onto his/hers sales invoice. However, they should include the amount of VAT somewhere on the invoice with the wording
“Reverse charge: Customer to pay VAT to HMRC”
- The contractor will now need to include the VAT in both box 1 and box 4 or their VAT return. The figure would normally have just been included in Box 4.
In this way the contractor is not out of pocket
- The sub-contractor will no longer be required to include anything in box 1 as the VAT on the sale is included in the contractors return.
- The sub contractor will however need to include the net sale in box 6 as normal.
- If the sub contractor is not paying VAT over to HMRC (as the contractor is now doing this) then it is very likely that the sub contractor will start to apply for VAT refunds.
HMRC says the VAT reverse charge for construction does not apply to subcontractors unless the answer to all of the following questions are positive:
- Are any of the supplies you are making within the scope of the CIS?
- Is the supply standard rated for VAT ie 20%
- Is your customer (the contractor) VAT registered?
- Are you sure the contractor is not an end user?
If the reverse charge does not apply to the services a subcontractor provides to a contractor then normal VAT rules apply – you should invoice for the VAT and account for it in your VAT Return.