VAT Reverse Charge for building and construction services

What is reverse VAT and how does it work?

The VAT Reverse Charge is used by suppliers and contractors as an alternative way of paying VAT.

Very simply, the customer enters the VAT they would currently pay over to the supplier, onto their own VAT return as output tax due and claims this back as input tax on purchases in the normal way on the same VAT return.

By way of example, under current rules, the supplier invoices £100 plus VAT = £120. The customer then pays £120 to supplier. The supplier pays the £20 to HMRC through their VAT return.

In future, the supplier will invoice £100 and the customer pays £100 to the supplier. The customer puts £+20 and £-20 (assuming it can recover all the VAT it is charged) on its VAT return.

What services will be affected?

Reverse charge VAT only applies to supplies of building and construction services liable to VAT at 5% or 20%, where the payments currently go through the Construction Industry Scheme (CIS) and where both the supplier and the customer are registered for VAT.

It doesn’t apply to supplies to final customers (end users), and doesn’t apply to supplies to intermediaries connected to end users who buy the services and re-sell them.

Finally, it does not apply to employment businesses making supplies of staff or workers, but does apply to labour only sub-contractor’s services.

What do you need to do?

Suppliers will need to check that their customer’s VAT number is valid and that they are registered for CIS. You will need to review your contracts and decide whether the reverse charge applies and set up the relevant accounting and bookkeeping records to record these transactions.

What is a reverse VAT invoice?

You will also have to make sure your invoices show the correct information so that customers know they need to account for the VAT.

This would, for example, be to include reference to the specific legislation (reverse charge under s55A VATA 1994) or just something to clarify the position, e.g. “reverse charge: customer to pay the VAT to HMRC”.

In all cases, it is important to ensure the VAT amount is not included in the amount charged to the customer.

This will impact your cash flow, and as a result of these changes, you may find yourself in a regular VAT repayment position. You may want to consider monthly VAT returns.

Customers will have to check that their supplier is VAT registered and tell them in writing if they are exempt from the reverse charge because they are an end user or an intermediary.

Customers also need to find out how to account for reverse charge VAT on their VAT return.

Visit the government website for more detailed information on VAT Reverse Charge invoices.

Problem areas

So far so good, but the Reverse Charge is not the same as CIS. If the contract is for supply and fix, then the Reverse Charge applies to the full value even if labour and materials are invoiced separately.

Contracts might be for a mix of services, some within the scope of the Reverse Charge and some outside of it.

HMRC give the example of a joiner constructing a staircase off-site (not subject to the Reverse Charge) who then installs it, which is within the Reverse Charge. Helpfully HMRC say you can disregard it that if that part within the Reverse Charge is less than 5%.

FAQs

How do I reverse VAT?

Reversing VAT allows customers to charge themselves VAT and pay it directly to HMRC. The service is for businesses who buy services from a supplier and then sell them on to the consumer.

The system stops suppliers avoiding VAT payments and does not apply to businesses that provide a service directly to the consumer.

Can I claim back reverse charge VAT?

Domestic Reverse Charge VAT can be claimed back on your tax return. Simply input the value of your VAT purchases in box 4 of your VAT return using the normal rules.

Does the VAT Reverse Charge still apply?

From the 1st March 2021, the reverse charge VAT only applies to VAT registered businesses that supply and receive services under the CIS (Construction Industry Scheme).

How does reverse charge VAT work for contractors?

Reverse charge VAT enables sub-contractors in the CIS scheme to not charge VAT on invoices to contractors in the CIS scheme. Instead, the contractor is responsible for all VAT in their VAT return to HMRC.