If you’re registered under the construction industry scheme and have a VAT registered business, you may get impacted by the VAT reverse charge for building and construction services. The CIS VAT reverse charge, which was previously proposed to be launched on 1 October 2019, was first delayed by 12 months to give more preparation time to businesses and then a further 6 months due to the pressure caused by Coronavirus. However, the Government has confirmed that there will be no further delay, and these rules will surely be implemented from 1 March 2021.
- What is this New Reverse charge all about?
- When the VAT reverse charge applies?
- To whom CIS reverse charge does not apply?
- How to raise an invoice & VAT charge?
- 5% disregard rule
What is this New Reverse charge all about?
HMRC has launched this new rule to prevent the construction industry from the “Missing trader” VAT fraud, where a business output tax is charged by a contractor, and then they disappear without forwarding the VAT to HMRC. From 1 March 2021, if a supply falls under the reverse charge, the builder supplying the service cannot charge VAT on their invoices issued to the other VAT registered construction industry customers. It means that the customer receiving the supply will be accountable for paying VAT to HMRC instead of paying it to the supplier. The customer will then declare the VAT in their own VAT returns as output VAT tax and claim the same as input tax. Since the VAT is not being paid to the supplier, HMRC will not lose out on the VAT even if they decide to disappear. Further, HMRC will have special powers to assess the customer for the VAT due under the reverse charge if an incorrect treatment was applied.
When the VAT reverse charge applies?
VAT reverse charge applies when all the following conditions are met –
- Both supplier and customer must be registered under CIS.
- It applies to the supply of construction services and materials.
- The transaction of supplying construction services and materials should take place between a UK VAT registered supplier and UK VAT registered customer.
- It should be made at VAT standard/reduced rate.
- The supplier and customer are not connected.
- A VAT registered customer intends to make an on-going supply of construction services and materials to another party.
For more details on when the reverse charge will apply, you can download the flowcharts available in HMRC’s technical guidance.
To whom CIS reverse charge does not apply?
CIS reverse charge does not apply to the supplies made to the following –
- Non-VAT registered customer
- End-users (Normal VAT rules apply)
- Connected intermediary supplies (such as a landlord and his tenant in the same group/two companies in the same group)
Further, the VAT reverse charge will not apply to zero-rated services such as the construction of new dwellings. When one VAT registered business didn’t make an onward supply of construction services and confirmed being an end customer, normal VAT rules apply.
How to raise an invoice & VAT charge?
If you are supplying a service as a supplier subject to the domestic reverse charge, you must adhere to the following norms –
- Display all the required information on a VAT invoice.
- Make a note and show it on the invoice to make it clear that this invoice contains domestic reverse charge and customer needs to pay the VAT.
- Clearly state how much VAT is charged under the reverse charge or the VAT rate in case the VAT amount cannot be shown. As a supplier, you must take care that the VATshould not be included in the amount charged to the customer.
Invoice example - Click here
If your accounting software cannot show the reverse charge
In case your accounting software cannot show the VAT amount to account for under reverse charge, you must do the following –
- State that the customer receiving the supply will be accountable for paying VAT to HMRC.
- Add words “customer to account to HMRC” to clearly state that customer is accountable for paying VAT for the reverse charge.
- Ensure that customer can identify good or services containing reverse charge.
5% disregard rule
Under normal circumstances, even if one service in the supply is subject to a reverse charge, all other services would fall under the reverse charge. The government has introduced a new concept, where if only some of the work in a supply/invoice is subject to reverse charge and if that value is 5% or less than the whole value of the supply, it can be disregarded, and normal VAT rules will apply.
For example, John the electrician takes two jobs for Big Constructor Limited:
- job carried out in an office room for Constructor’s client: £250
- job carried out installing new electrical works at Constructor’s new office: £6,000
Big Constructor Limited is registered for both the construction industry scheme (CIS) and VAT.The Constructor has confirmed that they are the end-user for the new office work.
John raises his sales invoice as a single invoice on 1 May 2021. The invoice will normally be subject to reverse charge because it includes some reverse charge work, but because the value of the reverse charge work is ‘5% or less’ of the whole invoice (£250/£6,250 = 4%), the supply will be subject to normal VAT rules; John will therefore raise an invoice for £6,250 plus £1,250 VAT.
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Disclaimer - "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".