Domestic Reverse Charge

For The Building & Construction Industry

The government is introducing new Domestic Reverse Charge VAT legislation aimed at tackling fraudulent activity in the building and construction industry, which will come into effect on 1st October 2020.

Contractors, subcontractors and the construction businesses that work with them who carry out activities that need to be reported under CIS will be affected, here’s what you need to know…

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What Is The VAT Reverse Charge?

The VAT Reverse Charge refers to a new piece of legislation released by the UK Government, you can take a look at the comprehensive guidance from HMRC here.

In brief, the VAT reverse charge will mean that certain businesses within the construction industry will no longer have to charge VAT on the supply of services or materials that are required to be reported under CIS. Other businesses will be required to account for the VAT they would have paid to their supplier directly to HMRC.

This has come about because of the opportunity for VAT fraud, particularly with regards to micro businesses, such as smaller contractors and sub-contractors, who  do not pay over the VAT they have collected.

The Domestic Reverse Charge for VAT in the building and construction industry will apply to building and construction services supplied at the standard or reduced rates that also need to be reported under CIS scheme, but relates not only to the supply of labour but materials used too.

The Reverse Charge will not apply to consumers or final customers of building and construction businesses who do not make onward supplies of the building and construction services in question. Any consumers or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them.

More information on VAT Reverse Charge can be found in our latest blogs below.

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How Will Reverse Charge VAT Affect My Business?

Due to the nature of this industry, there may be occasions where you are paying the reverse charge VAT and occasions where you are not doing so.

That’s why a thorough understanding of the new reverse charge VAT system is necessary for all companies in the industry, and why many are now choosing to work alongside experienced accountants.

Below we’ve listed the possible complications per business type, but please remember, there are no hard and fast rules, and a lot of grey areas between.

Subcontractor - not VAT registered

The good news for you, is that if you are not VAT registered, and hence, under the VAT threshold, it’s business as usual for you. But you still need to understand the reverse charge if your business was ever to pass that threshold and was required to register for VAT.

Subcontractor - VAT registered

In most cases, you will now be affected by the reverse charge, and you will be required to include details of the VAT due on your invoices, but you will not receive the VAT portion of your invoice from your customer.

This does mean that you may to suffer from the loss of short term cash flow as you will no longer get the output VAT paid to you

The subcontractor  must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT by noting suitable wording on the invoice such as “Reverse charge: Customer to pay VAT to HMRC” or “Reverse charge: VAT Act 1994 Section 55A applies”

It applies only to services that are made to a contractor: it does not apply to an “end-user” customer. The subcontractor will need to be satisfied that the supply falls within the reverse charge rules and in particular that the customer is a VAT-registered contractor not an end-user.  It remains to be seen what steps a subcontractor will be expected to take to verify this or what the position will be should he get it wrong.

It is expected that an end user will make it clear to the supplier that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. The subcontractor should get this in a written form so that it can be retained for future reference.

Contractor / Occasional Subcontractor - VAT registered

Depending on who your customer is, you will need to decide on a case-by-case basis whether or not to use reverse charge VAT. The simple rule is that if your customer is the end customer, then you will charge VAT as normal, and if your customer is part of a chain, you use reverse charge. This will result in some cashflow disturbance and perhaps more business admin than usual.

Customer / End User - VAT or non VAT registered

The reverse charge does not apply to you, and any contractor or subcontractor who accidentally applies it on your invoice should be informed and the invoice altered back to normal VAT rules.

Under the reverse charge procedure, the main contractors will:

  1. Account for the VAT on the subcontractors services as output tax in box 1 of the VAT return and
  2. Treat the same amount as input tax to be reclaimed in box 4 on the same return

Therefore Input tax will normally be recoverable in full, so the transaction has a nil net tax effect for the main contractor.

Construction company workers on a building site

What Should Constructions Companies Do To Prepare?

For any businesses who are going to have to use Reverse Charge VAT within their business, you will need to ensure the following happens:

  • Review your contracts with subcontractor suppliers to check if this will affect your working relationship
  • Speak to your customers and let them know about the changes they should expect from your side
  • Speak with customers, sometimes on a case-to-case basis, to check if the customer is or is not the end user, as this will affect who pays the VAT and who reverse charges VAT
  • Check how the new legislation may affect your cashflow and devise a plan to prepare for that
  • Ensure your MTD-compliant accounting system is set up to handle reverse charge VAT (you can find out more about our recommendations in this blog)
  • Ensure anyone who deal with accounting, invoicing or payments fully understands these changes
  • If you have an accountant, book in a review to ensure you fully understand the changes necessary for your business
  • If you don’t have an accountant, consider setting up with one to avoid unnecessary administrative errors

Get Reverse Charge VAT Right The First Time

As you may have gathered from the information on this page, the Domestic Reverse Charge is a complex tax system. Making mistakes, especially at first, will be too easily done. But correcting those mistakes may feel like untangling a box full of wires.

To avoid this, you need to really know Reverse Charge VAT inside out. Or you could consult with a specialist Chartered Accountant. Our team have been busy learning this new legislation so that we can assist current and new clients with their Reverse Charge VAT, and make the whole process simpler.

Your time is valuable, and there’s no need to spend it on tedious and complex business tax admin, so why not outsource to a reliable professional?

If you’re considering using an accountant for Reverse Charge VAT for the building and construction industry, please complete this form below and we will offer you:

    • A free no obligation consultation
    • Advice about your current position in regards to Reverse Charge VAT
    • Information on other services we can provide to ensure your company is as tax efficient as possible