Reverse charge VAT 1: What it is and what is changing
Updated: Feb 24
>> VAT Reverse Charge begins the 1st March 2021 <<
Unless you have been living under a stone, you will likely have heard of the new reverse charge VAT scheme HMRC is bringing into effect.
To give it its full honorary title:
The VAT domestic reverse charge for building and construction services.
This change will impact suppliers or 'sub-contractors' - those supplying the services - and the main contractors they serve.
Or to be more specific:
Individuals or businesses registered for VAT in the UK, which sell to other VAT-registered businesses.
Entities that provide services specified under CIS. These include the construction, renovation and demolition of structures; painting and decorating, as well as services such as heating, ventilation and air conditioning.
In short, it means the customer (contractor) becomes responsible for the VAT due to HMRC instead of the supplier (subcontractor).
Subcontractors must now invoice the contractor as normal, but state the VAT amount on the invoice as a Reverse Charge - see the example here.
The VAT reverse charge for construction is an extension of the Construction Industry Scheme (CIS). It only applies to transactions that are reported under the CIS between VAT-registered contractors and sub-contractors.
The scheme means those supplying construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer (contractor) will account for the VAT (that is, it will be considered input tax for them, as if they’ve made the supply to themselves).
Simply put, for services provided, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.
The payment received will be for the cost of the work done (plus materials used), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice.
In reality this isn't new. In fact, it was first announced back in October 2019 but was postponed twelve months to allow for Brexit to be 'resolved'.
Then a little thing called COVID-19 threw everything up in the air leading to a further five month delay. But there will be no more delays. You need to be ready for the 1st of March.
As a subcontractor, the result is a lower cashflow because the VAT amount is no longer being paid into your account.
This, in our eyes, makes life simpler, and less risky in the long run.
For the contractor, the onus is now on them to manage the VAT for the various services rendered.
Later in this series I'll talk about how each party can mitigate the impact of the change.
P.S. Don't forget to look back at some of our other articles in the Reverse charge VAT series: