Domestic VAT Reverse Charge (aka CIS Reverse Charge) is a piece of legislation that shifts the way the Construction Industry Scheme (CIS) & Value Added Tax (VAT) registered Contractors and Sub-Contractors handle and settle Value Added Tax.
Under normal circumstances, a supplier that is registered for VAT simply charges the relevant amount on top of their normal taxable supplies. The responsibility for collecting and paying the VAT over to HMRC remains with the supplier.
From 2021 onwards the new rules for those operating within the construction industry, involve the transfer of the responsibility to charge VAT from certain types of suppliers (sub-contractors) to the customer (contractor). In this case, the customer receiving a service will no longer pay the VAT portion of an invoice to the supplier, instead of paying the VAT directly to HMRC.
The new legislation came into effect on 1st March as an anti-fraud measure to eradicate criminal attacks on the UK VAT system. The rules aspire to eliminate “missing trader” fraud, where suppliers receive VAT from their customers but fail to pay the VAT to HMRC.
The Reverse Charge applies to VAT-registered businesses that supply or receive standard or reduced-rate VAT construction services reported under CIS in the UK. It does not apply to zero-rated services.
If your business receives an invoice with the Reverse Charge applied, you must account for the VAT amount as part of your overall input tax.
For clarity, we have created a HMRC- sourced pdf flowchart to illustrate when the Reverse Charge is applied.
The Reverse Charge does not apply to taxable supplies made to the following customers:
End-users are VAT and Construction Industry Scheme registered businesses that do not supply building and construction services supplied to them. An ‘intermediary supplier’ receives domestic reverse charge services and makes an onward supply of those services (or part) without material alteration or further processing. They could also be connected to the end-user by either the usual connected parties’ rules or by having an interest in the same land or property as the end-user (for example, landlord and tenant).
They should send a reverse charge letter to each of their sub-contractors advising them that VAT Reverse Charge does not apply to the invoices sent to them. Sub-contractors that receive a similar letter from their contractors should clear the VAT Reverse Charge check box from their contractor’s contact record.
The Reverse Charge only applies to businesses that supply services to another business, that will also still sell on that service. It does not apply to those that provide services to consumers. You ought to use the Reverse Charge for the following services:
VAT reverse charge cannot be used on these services when supplied on their own:
To prepare for a Reverse Charge, you need to:
As explained previously without the Reverse Charge suppliers would charge VAT and include it in the invoice to the customer. They would then report and pay the output VAT charged to HMRC via the VAT return.
When handling Reverse Charge, a VAT registered supplier should no longer add VAT to their invoice, but instead, they should notify the customer that the supply/invoice is subject to Reverse Charge. The customer should then account for the output VAT. The customer must account for the output tax (in box 1 of the VAT return) and claim the input tax (in box 4 of the VAT return).
Given that all invoiced services are subject to the Reverse Charge, it is applied to the whole invoice, including materials. Nonetheless, if the reverse charge part is 5% or less of the value of the whole invoice, it can be disregarded, and normal VAT rules will apply.
Points to note
A supplier is qualified to work within Reverse Charge if:
A subcontractor should not enter anything in box 1 of the VAT return. However, they must record the net sale in box 6. If you are using an accounting system, you should use the correct tax code for the transaction to fall into the correct boxes. Consequently, make sure your invoices show that the Reverse Charge applies so that customers will no longer pay you any VAT. When reconciling customer’s payments against invoices issued, remember to withhold the VAT element for any CIS-related supplies with any VAT registered customers.
As the subcontractor is not paying VAT on their sales, they may become a repayment trader with HMRC. That means your business VAT return claims money from HMRC rather than making a payment. HMRC advises such businesses to make monthly returns to speed up payments received from HMRC.
A contractor is liable to Reverse Charge if:
A contractor should account for the Reverse Charge VAT the subcontractor has notified you of. For your VAT return, enter the output tax on purchases to which the domestic Reverse Charge applies in box 1. You should not enter the value of such purchases in Box 6. It is worth bearing in mind that you can 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. You will be required to pay any VAT due directly to HMRC as part of your normal VAT settlement process. The overall effect on your VAT liability will be neutral because the output VAT is covered by the input VAT. To pay the right amount of VAT, ensure the invoice you receive has correct VAT rates and the services listed are eligible for the Reverse Charge.
If you are a subcontractor on one project and the main contractor on another, observe the VAT status of your services for each construction project you are working on.
Feel free to contact Spondoo Accountants on how to go about this.
An invoice subject to the domestic Reverse Charge must:
If your software cannot show the amount of VAT to account for under Reverse Charge, contact Spondoo Accountants for guidance.
Being new legislation, HMRC is aware of the difficulty in the implementation of Reverse Charge. In this regard, they will apply a light touch in dealing with any errors made in the first 6 months of the new legislation. HMRC officers may assess for mistakes during the light touch period. However, you will be liable to penalties if HMRC feels you are intentionally taking advantage of the measure by not accounting for it correctly.
Reverse Charge errors should be corrected quickly because lengthy outstanding under–declared or overcharged sums are hard to correct or recover. It is advisable to consult an accountant if the new reverse charge VAT rules apply to your business.
Do you have more questions on Domestic Reverse Charge? Contact us for Reverse Charge compliance support.