With effect from 1st March 2021, certain transactions between contractors and sub-contractors in the construction industry will fall under the new Domestic Reverse Charge for Construction Services scheme.
This scheme removes the need for contractors to pay the VAT to their sub-contractors but rather this is paid directly to HMRC. This removes the burden of VAT from the sub-contractor but may have a negative impact on their cashflow while the scheme settles in.
Who is affected?
Those who provide the following services are affected:
- 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
You must use the reverse charge if you’re VAT registered in the UK and supply building/construction services and:
- Your customer is VAT registered
- Your payment is reported under the CIS scheme
- The services you are supplying are either standard or reduced
- You are NOT an employment business supplying staff or workers, or both
- Your customer has not given written confirmation that they are an end user or intermediary supplier
See the flowchart below which has been provided by HMRC and should be consulted on each contract to ensure appropriate VAT treatment.
What do you need to do?
In order to comply with the new regime, the sub-contractor must issue the invoice to the contractor without Output VAT, the invoice must state that it is being issued under the ‘Domestic Reverse Charge’ scheme and must show all the information required on a regular VAT invoice. The invoice must show the amount of VAT liable under the reverse charge or the rate of VAT if the amount cannot be calculated but the VAT should NOT be shown as being charged to the customer.
The required wording on the invoice can be taken from the following:
- reverse charge: VAT Act 1994 Section 55A applies
- reverse charge: S55A VATA 94 applies
- reverse charge: Customer to pay the VAT to HMRC
If you receive an invoice from a supplier that states that reverse charge will apply, you should ensure the VAT is recorded appropriately as output VAT on your VAT return to ensure that the required amount is paid to HMRC. This should only show as output VAT and not as sales, the purchases are already included on the VAT return from the supplier invoice.
How will this work in practice?
For those clients using Quickbooks, we have been advised that a new VAT code will be made available from Monday 1st March 2021 which will ensure the correct treatment of this scheme. As soon as we get more information on this, we will provide this to those affected. If you use other software, they should be able to advise how their software will operate this new scheme.
For more information, you can refer to HMRC by clicking here
We will provide as much help and assistance in this area as possible, however until the software is updated to reflect the changes, we cannot give specific examples.