The VAT reverse charge system – construction

8th March 2021

The new VAT reverse charge system came into force on 1 March 2021 for people working in the UK’s building and construction industry. If you’re wondering what it entails, we’ve answered FAQs below …

By Stephen Morgan, Partner

1. What is the VAT reverse charge system?

Delayed because of the COVID-19 pandemic and Brexit, the VAT reverse charge for construction is an extension of the Construction Industry Scheme (CIS). It only applies to VAT-registered businesses who are supplying/receiving services that are reported under the CIS. It doesn’t apply to end users, landlords or tenants.

Suppliers (sub-contractors) of construction services to a VAT-registered customer (contractor) will no longer have to account for the VAT. Instead, the contractor will account for it. Contractors will need to handle and pay the VAT directly to HMRC.

Invoices will need to change as they should show all the usual information for a VAT invoice and also that the reverse charge system has been applied.

HMRC provides a list of the construction services that must apply the VAT reverse charge as part of its general guidance here

2. What happens if a construction project began before the VAT reverse charge system started and won’t finish until after it  came in?

They will look at the tax point. If the tax point is on or after 1 March 2021 then the reverse charge should be applied. If the tax point is before that date, the previous VAT rules apply.

The tax point is likely to be the date that the VAT invoice was issued, or the receipt of payment – whichever happens first. Or it could be the date that the supplier received payment if a pre-payment was made. You can check the ‘Time of Supply’ rules.

3. What VAT rates does the reverse charge for construction apply to?

It applies to standard and reduced-rate VAT supplies but not to zero-rated supplies. If your business is not VAT registered then the reverse charge isn’t applicable. Reverse charges do not contribute to a company’s potential VAT threshold.

4. What does the VAT reverse charge for construction mean for sub-contractors?

If you supply CIS-regulated construction services, the way you reconcile customers’ payments against invoices issued will change. This is because your VAT-registered customers will be withholding the VAT. On your VAT return, you’ll need to enter the output tax value on sales in Box 6.

5. How will the VAT reverse charge for construction affect contractors?

If you purchase CIS-regulated construction services, you’ll need to pay any VAT due directly to HMRC as part of your normal VAT settlement process – and not to your supplier.

To avoid over- or underpayments, it’s worth ensuring that the VAT invoices you need to pay reverse charge on are correct! You should enter the output tax on purchases to which the charge applies in box 1 of your VAT return. You can use Box 4 to reclaim the input tax on your domestic reverse charge purchases – and include the value of the purchases in Box 7.

This is a general guide. If you’d like more information and help on the VAT reverse charge for construction services, please contact us.

About the author

Stephen is a general practice partner.  He joined Wise & Co in 1994 where he trained as a chartered accountant and became a partner in 2006.  He acts for a broad range of clients.  They include many barristers, and individuals and companies working in the hospitality and leisure sector and in the media and entertainment sector.  Stephen is skilled at providing them with practical advice dovetailing technical and commercial expertise.  Outside work, Stephen remains a keen sportsman!

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