New VAT rules are due to come into effect from 1st March 2021 which will impact on accounting for VAT for transactions in the construction sector. The new rules are called “the domestic reverse charge for supplies of building and construction services”.
This is a major change to the VAT collection process for those who buy or sell construction services – both the subcontractor and contractor.
According to the normal VAT rules; the supplier charges VAT, which the customer pays to the supplier. Then the supplier pays the VAT to HMRC. With this change, it is the customer who pays VAT to HMRC. There has been no change to VAT rates or reclaiming VAT, but the new reverse charge has been implemented to prevent VAT fraud.
Both the supplier and customer must be registered for VAT and CIS payments can be either gross or under deduction.
Under the new reverse charge system, the sub-contractor will not charge VAT on their invoice to the contractor for whom they are working and will not account for output VAT. Although they will identify the rate and amount of VAT due and notify their customer that the VAT must be accounted for by them on their VAT return. The sub-contractor will be paid the net value of the work done (not including VAT).
What services does the Reverse VAT Charge cover?
The new reverse charge will apply to a wide range of services in the building trade. It will primarily affect those activities covered by the construction industry (CIS) payment rules. These services include: building construction, alteration and repairs; heating, lighting, ventilation, power installation; and painting and decorating.
Who is affected by the Reverse VAT Charge?
Typically, the reverse charge will affect sub-contractors that offer services other contractors in the construction sector. It is applicable if the services provided are standard rated or reduced rated, and within the scope of CIS.
Suppliers:
You must use the reverse charge from 1 March 2021, if you are VAT registered in the UK, supply building and construction industry services and:
- your customer is registered for VAT in the UK.
- payment for the supply is reported within the Construction Industry Scheme (CIS).
- the services you supply are standard or reduced rated.
- you are not an employment business (also known as labour agencies) supplying either staff or workers, or both.
- your customer has not given written confirmation that they are an *end user or **intermediary supplier.
Customers:
You must account for the reverse charge from 1 March 2021, if you are VAT registered in the UK, receive supplies of building and construction industry services and:
- your supplier is registered for VAT in the UK.
- payment for the supply is reported within the Construction Industry Scheme (CIS).
- the services you receive are standard or reduced rated.
- your supplier is not an employment business supplying either staff or workers, or both.
- you are not an end user or intermediary supplier who has notified your suppliers of that fact.
Steps to take
Suppliers:
As a supplier there are several steps you must take in order to apply reverse charge. Firstly you must ensure that your customer has a valid VAT number and check their CIS registration. Then you must review your contracts to decide if the reverse charge will apply and tell your customers. It is important to get your customers to confirm if they are an end user or intermediary supplier. You must alter your invoicing to identify the VAT due, however, you must not charge this to your customer. There must be instruction on the invoice to tell the customer to declare this VAT on their VAT return. You must keep your accounts up to date with your reverse charge transactions.
Customers:
If you are a customer you must also take steps to comply with the new rules. You must check that your supplier has a valid VAT number and CIS registration. You must also review your contracts to decide if the reverse charge will apply. Be sure to tell your suppliers you will not accept normal VAT invoices. It is important to account for the VAT due to HMRC (as indicated on the suppliers’ invoices) in your VAT return. Remember to only pay the net value of the work to your sub-contractor and account for the reverse charge transactions in your accounts.
It is the case that some businesses play the role of both supplier and customer. In these cases you must follow the steps for each as outlined above.
Examples:
1.
A VAT registered electrician has been hired by a (VAT registered) contractor to rewire a building.
The electrician charges £4,000 for costs and labour. He charges the contractor the £4,000 in their invoice but also notes and additional £800 VAT (20%) which is not charged. The contractor would pay the £4,000 and must account for the £800 VAT on their VAT return in box 1 and box 4. They would therefore not pay or receive any VAT from HMRC for this transaction.
The new VAT changes will mean that the contractor does not have to pay the £800 to the electrician and in turn, does not reclaim it at the end of the VAT quarter. The contractor will have to note the £800 in their VAT return.
2.
A VAT registered heating engineer has been asked to fit central heating in 3 properties by a contractor who is constructing houses for a developer.
The engineer has £10,000 of costs and labour to charge to the contractor. The invoice that they issue requires £10,000 to be paid to them by the contractor, but also notes a £2,000 VAT charge that the contractor must note on their VAT return. The £2,000 is not paid to the heating engineer.
As the contractor is also providing CIS services, they must also make the developer aware of the VAT for the services they supply so that they can note on their VAT return and notify their own customers in invoices.
In summary, the new changes have no affect on current rates or reclaim rules.
Suppliers must not collect VAT from customers on their invoices but should show the VAT charge on the invoice.
The customer must then account for the VAT as stated on the invoice.
How can we help?
If you need any help working out if the VAT reverse charge applies to you, or if you have any questions regarding the changes to VAT, please contact your Accounts Manager we will be more than happy to help or discuss with you.
*End users
End users are consumers and businesses, or groups of businesses, that are VAT and CIS registered but do not make onward supplies of the building and construction services supplied to them. Namely those who have an interest in the land where the work is being undertaken. Where the end user is VAT and CIS registered, the reverse charge does not apply to supplies made to them where they notify the contractor in writing that they are an end user.
**Intermediary suppliers
Intermediary suppliers are VAT and CIS registered businesses that are in a corporate group with an end user as defined above. If an intermediary supplier buys construction services and re-supplies them to an end user in the same corporate group, they are all treated as if they are an end user and the reverse charge does not apply, if they notify the contractor that they are an end user.