Business
After a couple of postponements in October 2019 and October 2020, the VAT construction reverse charge is set to come into action from 1st March 2021. These rules affect VAT-registered businesses in the Construction Industry Scheme (CIS).
The new rules change how VAT is handled for certain kinds of construction, with the supplier no longer having to account for the VAT.
What are the new rules?
When a VAT-registered supplier makes a supply covered by these rules to a VAT-registered client, the supplier will no longer charge VAT on the invoice provided the client isn't an end user/client. These rules ONLY apply to standard rate or reduced rate VAT construction services. The reverse charge will not apply to zero-rated transactions, such as new builds.
What do I do as a subcontractor?
If the rules apply to the supply you're providing, your invoice doesn't need to include VAT. Instead, you'll need to include a line stating that the supply falls under the reverse charge rules and the rate of VAT that would normally be applied to this invoice.
This reverse charge VAT isn't included on your VAT return. The client/customer will include it on their VAT return. This only applies if you're in a supply chain and the customer isn't an end client.
What do I do as a contractor?
If you're a contractor receiving a reverse charge invoice from a subcontractor, then your VAT return will show the reverse charge as both output and input VAT.
This leaves a net effect of zero on your VAT return, with the reverse charge applying if the next in the supply chain isn't the end client. If the next customer in the supply chain confirms they're the end client, you will just charge VAT as normal.
What about materials?
Normally under CIS rules, materials are excluded from the CIS deduction. However, if the supply falls under the reverse charge rules, then any materials used directly in those services will also have the reverse charge applied to them.
An example:
Mr X is VAT registered and supplies construction services to Mrs Y, who's also VAT registered. The total amount on the invoice will be £8,000 as a service supply and £2,000 as materials that directly relate to the service. Mrs Y then makes supplies on that project to Mr Z who's also VAT registered and has confirmed he is an end client.
Old rules: Mr X invoices Mrs Y £10,000 + VAT.
New rules: Mr X invoices Mrs Y £10,000 with the invoice saying that the reverse charge applies.
Mr X only needs to include the £10,000 in Box 6 with nothing in Box 1 on his VAT return. Mrs Y will then account for both output and input VAT both on her return, leaving the net effect as neutral.
As Mr Z is an end client, Mrs Y will then invoice normally with VAT charged at the appropriate rate instead of a reverse charge.
You can find a breakdown of the types of services falling under the reverse charge scheme here and flowcharts which help to decide whether you need to use the scheme here.
