VAT reverse charge rules came into effect on 1st March 2021, altering the way businesses operating the Construction Industry Scheme (CIS) and who are VAT registered present their invoices.
These new rules are complex, and you’ll need to be aware of what they may mean for your business’s sales invoices and VAT returns.
What is the VAT reverse charge?
The reverse charge is a way of accounting for VAT where the end-customer accounts for VAT and the supplier of construction services does not. The reverse charge means the end-customer receiving construction services has to pay the VAT to HMRC instead of the supplier. The end-customer recovers VAT subject to the normal rules set by HMRC.
How are the new rules applied?
The new rules apply to standard rate VAT or reduced-rate construction services provided by VAT registered businesses. The reverse charge does not apply to supplies of services which are zero-rated, such as the construction of housing. If you don’t make an onward supply of construction services, you won’t have an end-customer and normal VAT rules apply.
By way of example, a Housing Association (that has contracted a building company to construct apartments) will not be making any onward supply of construction services so normal VAT rules will apply between the building company and the Housing Association.
If invoices have both CIS and non-CIS registered supplies, the reverse charge applies to the whole invoice amount.
A typical situation where the reverse charge applies is where a sub-contractor makes a supply of services to a customer (or contractor) who then makes an onward supply of the same construction services to an end-customer. All parties in the chain are VAT registered. When the end-customer confirms they are the end of the supply chain, normal VAT rules apply.
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What do I have to do?
If you are a subcontractor
If you’re invoicing a customer (or contractor) in a supply chain, you’ll either have to charge VAT as normal or apply the reverse charge. For the reverse charge, your invoice total will not include VAT.
However, your invoice must include a statement advising your customer (or contractor) that the reverse charge rules apply, stating the amount of output VAT to be applied (20% if it’s the standard rate of VAT). Your customer (or contractor) will need to include that amount on their VAT return. You do not include anything on your VAT return about the reverse charge.
If you are a main contractor
If you are a main contractor receiving a VAT invoice from a subcontractor, you should continue to record it as a normal expense invoice and include input VAT on your VAT return.
You’ll also need to account for the reverse charge VAT the subcontractor has notified you about. The overall effect on your VAT liability is neutral as the output VAT is covered by the input VAT.
Other matters
It may be possible to be a subcontractor on one project and a main contractor on another, so you need to consider the VAT status of your services for each construction project you work on.
If you’re currently on the Flat Rate VAT Scheme and the majority of your supplies are affected by the VAT reverse charge, you might want to consider changing to the Standard VAT scheme as:
- The Flat Rate Income amount will be reduced, possibly to nil
- You will be losing the opportunity to reclaim input VAT on expenses.
FAQs
What is the VAT reverse charge for construction services?
The VAT Reverse Charge is a rule where the customer (contractor), rather than the supplier, is responsible for accounting for VAT to HM Revenue & Customs. This system was introduced to reduce VAT fraud in the construction industry.
When does the VAT reverse charge apply in construction?
The reverse charge applies when:
Both businesses are VAT registered
The services fall under the Construction Industry Scheme (CIS)
The customer is not the end user
The services are standard-rated or reduced-rated for VAT
Who needs to use the VAT reverse charge?
The reverse charge generally applies between:
Subcontractors and contractors in the construction supply chain
It does not apply when supplying services directly to the end user, such as the property owner or final client.
Does the reverse charge apply to all construction services?
No. It only applies to specific construction services covered by CIS, such as:
Building work
Repairs and alterations
Demolition
Installation of systems like heating, lighting, or ventilation
It does not apply to zero-rated services, such as many new residential builds.
How does the reverse charge affect VAT returns?
Under the reverse charge:
The supplier does not pay VAT to HMRC
The customer reports both the output VAT and input VAT on their VAT return (if reclaimable)
