VAT - Domestic Reverse Charge
The new VAT reverse charge for the construction industry -
To tackle VAT fraud in the construction industry HMRC are introducing a domestic reverse charge with effect from 1 March 2021. What does this mean for businesses in the construction industry?
1. What is a reverse charge?
The reverse charge is a mechanism for accounting for VAT whereby the customer charges themselves VAT, rather than the supplier charging VAT. This is being introduced to prevent missing trader fraud (i.e. where the supplier will charge VAT, be paid the VAT and then ‘do a runner’ before they declare it to HMRC). As the reverse charge makes it the customer’s responsibility to account for VAT there is no opportunity for the supplier to disappear without paying the VAT to HMRC.
2. What does this mean for me?
It means you may no longer need to charge VAT to your customers or no longer be charged VAT by your suppliers. You will need to review your contracts with customers and suppliers to see whether they are impacted by the reverse charge.
3. How does it work in practice?
If you are supplying a service that meets all the criteria for the reverse charge, you no longer charge VAT to your customers. You will need to validate that they are VAT and CIS registered and not an end user. If you use software to account for VAT and generate invoices you may need to change your tax codes. The sale should be reported in Box 6. Invoices should include wording that makes it clear that the domestic reverse charge applies and that the customer is required to account for the VAT. The invoice should also state how much VAT is due under the reverse charge, or the rate of VAT. The amount of VAT should not be included in the amount charged to the customer.
If you are receiving a service that meets all the criteria for the reverse charge and you are VAT and CIS registered and not an end user, you won’t be charged VAT by your supplier. You will need to charge yourself VAT, so the VAT due will be paid to HMRC in Box 1 and reclaimed in Box 4 (subject to the normal rules). The net value should be reported in Box 7. If you use software, you may have a tax code for the receipt of reverse charge services which will automatically calculate the VAT.
4. What construction transactions does the domestic reverse charge cover?
This domestic reverse charge will only apply to supplies of building and construction services that are subject to VAT at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies. HMRC have prepared a flowchart which has been replicated here.
5. When will the domestic reverse charge on specified construction services be introduced?
The domestic reverse charge will be introduced on 1 March 2021.
6. How should building contractors prepare for this change?
Businesses that supply or receive construction services need to understand how they may be impacted by this change. They should be identifying instances where they supply services to other businesses in the construction sector (rather than to a consumer of those services) or receive them for the purposes of selling them on. If they do operate in this way, they need to determine whether the services are included within the list of specified services. Suppliers that are caught by this will no longer charge VAT on their services as the recipient will charge themselves VAT. This could mean that businesses find themselves in a VAT repayment situation and want to move from quarterly to monthly VAT return.
7. What if I receive an incorrectly completed invoice?
If you receive an invoice which has VAT added when you think the reverse charge should apply, our advice is not to pay it but to query this with whoever issued you the invoice.
8. Do you have a handy flow chart which can help us decide if the new rules apply?
Funny you should ask. You can download one here
If you have any questions, don’t hesitate to contact us below: