VAT domestic reverse charge for Construction

HMRC are aiming to tackle fraud in the construction industry, specifically missing trader fraud, by making it the responsibility of the contractor or receiving sub-contractor to account to HMRC for VAT on applicable transactions.

The contractor will no longer pay over the vat to their subcontractor and will instead pay it directly to HMRC via their own return.

What does the reverse charge mean and apply to?

The reverse charge is widely known in the UK when goods and services are provided by a UK company to a VAT registered EU company. To aid the free flow of trade within the EU members, the VAT is not charged as the EU VAT registered business would in turn claim it back. So, the UK company produces a zero rated invoice and stipulates it is subject to the reverse charge. The EU company will account for the input and output vat on the return.

Who does the new rules apply. You need to consider the following:

You should identify the customers that the reverse charge applies.

5% disregard for the VAT reverse charge

If a subcontractor undertakes a mix of work, some which fall under the scope of CIS scheme, but the rest doesn’t you need to check the proportions of each to see whether the reverse charge applies.

If the work under the CIS scope is 5% or less then normal VAT rules are applied. If over the 5%, the new principles are applied to all the supply.

When does this new system start

This starts on 1 March 2021. You should ensure your invoicing, recording your transactions in your digital software and your VAT returns are correct.

Invoicing and payment

Payments to the sub-contractor will now not include VAT and this should be set out on the subcontractor invoice. The contractor will be paying the VAT directly to HMRC via their own return. This can still be reclaimed by the contractor in the usual manner, meaning the net impact is zero.

Where customers issue authenticated tax receipts or self billing invoices, HMRC recommend that the following wording is on the face of the invoice.

“Reverse charge: We will account and pay the output tax due to HMRC”

“Reverse charge: As the  UK customer, we will pay the VAT due to HMRC”

Subcontractors will no longer need to include VAT in the amount payable on sales invoices.

Subcontractors will still be required to clearly state how much VAT would have been due or the rate of VAT if the amount can not be shown.

The subcontractor is required to note on the face of the invoice that the domestic reverse charge applies and the customer is required to account for the VAT.

HMRC have suggested the following wording:

“Reverse charge: VAT Act 1994 Section 55a applies”

“Reverse charge: S55 VATA 94 applies”