From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services. This was introduced in order to combat VAT fraud in the building and construction sector.
The charge, which applies to standard and reduced-rate VAT services for individuals or businesses, is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors. The reverse charge means that a subcontractor will not charge VAT on its invoices to a contractor. Instead, the contractor will account for the VAT in their VAT return as both Output (sales) VAT and as Input (purchases) VAT.
Rules when making sales
If you are a subcontractor invoicing a contractor, you must make a note on the invoice to make it clear that the domestic reverse charge applies, and that the customer is required to account for the VAT – i.e. “Reverse charge: customer to pay VAT to HMRC.” You must also clearly show the amount of VAT, or the rate of VAT but the VAT due must not be included in the amount charged to the customer.
When it comes to completing your VAT return, you must not enter in Box 1 of the VAT return any output tax on sales to which the domestic reverse charge applies. But you must enter the value of such sales in Box 6.
Rules when making purchases
If you are a contractor receiving an invoice from a subcontractor you should not be charged VAT. You need to pay any VAT due directly to HMRC as part of your normal VAT settlement process instead of paying the VAT on CIS related supplies to your supplier.
When it comes to your VAT return, enter in box 1 of the VAT return the output tax on purchases to which the domestic reverse charge applies. But don’t enter the value of such purchases in Box 6.
You may reclaim the input tax on your domestic reverse charge purchases in Box 4 of the VAT return and include the value of the purchases in Box 7, in the normal way.
Flat rate scheme users
Reverse charge supplies are excluded from the flat rate scheme so should be accounted for and reports the same way that transactions are accounted for and reported under the standard scheme.
This reduces the amount of turnover that’s used as a basis for reclaiming VAT under the flat rate scheme and sub-contractors may want to reassess which of the standard or flat rate schemes are most beneficial.
How do you know if a business is VAT registered and registered for CIS?
To check if a business is VAT-registered you can simply ask them, or consult correspondence or their online materials.
Sub-contractors can verify CIS registration by asking the contractor for details, and should retain a copy of any documentation received.
Contractors should use the CIS verification system when taking on new sub-contractors.
When you must use the reverse charge
You must use the reverse charge for the following services:
– constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
– constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
– installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
– internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
– painting or decorating the inside or the external surfaces of any building or structure
– services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
When you must not use the reverse charge
Do not use the charge for the following services, when supplied on their own:
– drilling for, or extracting, oil or natural gas
– extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
– manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
– manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
– the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
– making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
– installing seating, blinds and shutters
– installing security systems, including burglar alarms, closed circuit television and public address systems