Domestic VAT Reverse Charge for the Construction Sector

A new domestic reverse charge is being introduced to the UK for the construction sector and this takes effect for invoices raised from 1st October 2019.

The reverse charge was introduced to counter fraud in the construction sector.

When does it apply?

This will apply to supplies between contractors of construction services where the contractors are both CIS registered and are required to report payments via CIS (Construction Industry Scheme) and VAT registered and the supply of services are liable to VAT at the standard or reduced rate.

The reverse charge only affects ‘specified supplies’ made between VAT registered businesses.

If your invoice consists of some CIS and some non-CIS supplies, your whole supply will be subject to the reverse charge

How does it work?

Normally, contractors who supply services will charge VAT and this is included in their invoice to the customer. The output VAT charged is then reported and paid to HMRC via the VAT return.

Instead, where these rules apply, the contractor should notify the customer that the supply is subject to the reverse charge and the customer should instead account for the output VAT.

This means the customer will account for the output tax (in box 1 of the VAT return) as well as claiming the input tax (in box 4 of the VAT return).

This could bring a cash flow benefit to the customer receiving the supply is the amount payable to the contractor/supplier would be less. This is assuming that the due date for payment to the contractor arises before the date that the VAT is due for payment.

If you are charging construction services to a customer who is not VAT and CIS registered, you should continue to charge VAT in the normal way and not according to the reverse charge rules mentioned above.

End users are those who receive building and construction services but do not supply those services along with other services, for example, a landlord or a developer. Payments by deemed contractors can be excepted from reporting through CIS, and in this case, the reverse charge will not apply. If the end-user does not provide its supplier with confirmation of its end-user status, it will still be responsible for accounting for the reverse charge.

Here is a link to the HMRC guidance: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services