What is the Construction Industry Domestic VAT reverse charge?
The Construction Industry Vat Reverse charge applies from 1 March 2021. The new rules mean customers account for the suppliers output VAT where domestic vat reverse charge applies. It applies to construction supplies made from one business to another business, that fall under CIS. It means the customer will no longer pay VAT on CIS supplies to the supplier but will stop the VAT and pay it directly to HMRC.
When do you apply the CIS reverse VAT charge?
You apply the CIS reverse vat charge when:
- The vat able supplies are for construction services and materials.
- The supplies are standard rated or reduced rated for vat.
- Both Supplier and Customer are CIS registered.
- Both Supplier and Customer are UK VAT registered businesses.
- Your customer is not the end user or Intermediary supplier business, but instead will make further supplies to a third party.
- The supplier and customer or not connected (eg landlord and tenant or connected businesses)
When does VAT reverse charge not apply?
- The supply is for VAT exempt materials.
- The supplies are not within CIS.
- The supply is made by an employment business for staff or workers.
- The customer is not vat registered.
- The customer is the end user so will not be making further supplies of construction to a third party.
- Within New build housing the reverse charge does not apply to standard rated items which are included in a Zero-rated supply of building and construction services.
- Supply and fix of goods not ordinarily incorporated in a new build housing.
- Items such as hire of equipment which are not within the scope of CIS.
Does reverse charge apply to labour only subcontractors?
The reverse charge does apply to labour only subcontractors. This applies if the services provided are:
- Standard rated vat.
- Reduced rated vat.
- Within the scope of CIS.
Does reverse charge VAT apply even if you are under CIS but receive gross payments for CIS?
If you work within the construction industry for CIS, even if you receive payments gross you will still be subject to the vat reverse charge.
What VAT schemes can you use under the VAT reverse charge?
You cannot use the Flat rate vat scheme for VAT reverse charge,
You cannot use VAT cash accounting schemes for supplies that are subject to reverse charge,
As the subcontractor you can account for the net sale when you receive the payment as you will not be accounting for the VAT under reverse charge.
As a contractor you will account for the input and output vat on the same return. You can account for the invoice on the date you make the payment unless the supplier gives you the tax invoice beforehand, where you will have to account for the invoice using the date of the invoice.
How will this affect cashflow?
With normal VAT a business will collect in all the vat owed to it by its customers and hold onto that vat quarterly until a VAT return is done. With the reverse charge your customer will not be paying the vat to you for relevant supplies which will affect your cashflow. In this case where you are likely to have regular vat refunds it may be better for you to apply for monthly VAT reporting rather than have to hang on for refunds for 3 months.
You can apply to complete vat returns monthly by signing into your online vat account.
EG: Normal vat rules:
A CIS supplier gives their CIS customer an invoice for £50000 net + vat of £10000.
The customer would pay the supplier £60000.
The supplier does not need to consider how much of the £10000 vat needs paying to HMRC until they complete their own VAT return which might be 3 months away.
EG: Reverse VAT rules:
A CIS supplier will now give their CIS customer an invoice for £50000 net, showing the invoice as no vat but stating on the invoice “ Reverse Charge: Customer to pay the VAT to HMRC” you should also clearly make a note on the invoice of how much the VAT should be or what rate of VAT applies.
The Supplier will only be paid £50000.
The Supplier will now need to wait until their next VAT return is due to be submitted before they can reclaim any overpaid vat.
How will Suppliers raise their invoice to the customer under VAT reverse charge?
Even if only a small part of the suppliers’ invoice is relevant to reverse charge, the entire invoice will be subject to reverse charge VAT.
The supplier will not add vat on their invoice but will need to use the wording:
“Reverse Charge: Customer to pay the VAT to HMRC” and show the relevant vat or the relevant vat rate within the note.
The supplier will show the net sale in box 6 of the vat return but will show no vat in box 1 of the vat return.
Quickbooks users help tip for vat reverse charge:
At the time of writing this article Quickbooks developers were working on the code to use for vat reverse charge supplies so for now it is advised to use the vat code 0.0%Z Zero Rated as this will allow the net supply to be shown in box 6 of the vat return but no vat will be shown in box 1 vat on sales box.
How will Customers account for the Suppliers invoice within their Bookkeeping?
Under normal vat rules the customer would show the suppliers vat charged under input vat only and then deduct that from output vat before paying VAT to HMRC.
Under reverse charge the customer will add the suppliers vat to both their output vat and their input vat using the Reverse Charge vat code within their bookkeeping software, meaning there will be no requirement for a further deduction of the Supplier vat charged when completing the vat return. The Vat from the suppliers’ invoice will be added to sales vat (Box 1) and purchases vat (Box 4) of the customers vat return.
Quickbooks users help tip for vat reverse charge subcontractor invoices:
At the time of writing this article Quickbooks developers were working on the code to use for vat reverse charge purchases so for now it is advised to use the vat 20.0% Rc MPCCs. You can activate this code by going into:
Select the cog in the right-hand corner and select ‘include inactive’.
You will then see the 20.0% RC MPCCs code which can be switched on from the right On off button.
Which contracts does the Construction Industry Domestic Vat reverse charge apply to?
Date Supplier invoiced Customer: Date payment made: Vat Treatment:
Before 1.3.2021 Before 31.5.2021 Normal VAT
Before 1.3.2021 From 1.6.2021 Reverse charge
From 1.3.2021 From 1.3.2021 Reverse charge
For all contracts starting from 1 March 2021, it should be decided at the start of the contract if reverse charge VAT applies.
All contractors should consider the value and volume of contracts with each subcontractor. If 5% of the contracts with a subcontractor fall within reverse charge, then the reverse charge may be applied to all the contracts with the subcontractor.
What are my next steps?
Make sure you understand which of your contractors fall into the vat reverse charge category,
Make sure you understand which of your subcontractors fall into the vat reverse charge category,
Become familiar with the vat codes within your bookkeeping software for reverse charge for inputting your supplier bills. A tip for Quickbooks users is provided above and will be updated when Quickbooks updates the code.
Consider your cashflow, do you need to move over to monthly vat returns, if so, you can complete the application from within your on line vat account.
Need extra help, support, guidance, get in touch with us so we can light the way.