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Do you work as a builder? If so, you need to know about the VAT reverse charge. It came into effect in March 2021, after being delayed twice due to Brexit and the Coronavirus. In this post, we will discuss what the VAT reverse charge is and how it may impact your business.
What Is The VAT Reverse Charge?
The VAT reverse charge applies when a VAT-registered construction business supplies construction services to another VAT-registered construction business.
In such a circumstance, the supplying business will need to issue a VAT invoice that states its service is subject to the domestic reverse charge. No VAT is added to the invoice as the recipient recovers the VAT due through its VAT return, usually as input tax.
Why Was The VAT Reverse Charge Introduced?
The HMRC brought it into existence to combat construction fraud. Such a circumstance might involve a construction business charging VAT for the services they have supplied but then failing to pay their VAT bill.
By moving the VAT charge further down the supply chain, this type of fraud should be made impossible. Similar reverse charge schemes have been introduced within other industries, including wholesale energy suppliers and computer chip retailers.
We have detailed blow some common questions which you may inquire about.
The reverse charge only applies to VAT-registered businesses that supply or receive services reported under the Construction Industry Scheme (CIS). If you provide a service to another CIS business VAT-registered, you can apply the reverse charge. However, if they aren’t VAT-registered, then the reverse order can’t be used, and you will be responsible for the VAT amount as part of your input tax.
The reverse charge applies to most of the building services that you would provide for another VAT-registered business. According to the HMRC, these include constructing, altering, repairing, extending, demolishing or dismantling buildings or structures, whether permanent or not.
Such work also applies to roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
Other eligible services provided by your company might include heating and lighting installation, the internal cleaning of buildings and structures, painting and decorating, and other integral services to complete a building project.
For a full description of the services that must apply the reverse charge, visit GOV.UK for further details. The information also lists services whereby the reverse charge must not be applied, so it’s worth noting if any apply to your business.
If VAT reversal charges don’t apply for the services you provide, standard VAT rules will apply. Therefore, you should invoice for the VAT as usual and account for this within your VAT return.
If you’re a contractor and you receive CIS regulated construction services, you will receive a reverse charge VAT invoice, assuming the service supplier is VAT-registered. You will need to pay any VAT due to the HMRC as part of your usual VAT settlement process.
To ensure you don’t pay too much or too little VAT, it’s essential to make sure the invoice you receive is correct and in line with current VAT rates. You should also check the services that have been listed because, as we said, not every service is eligible for the reverse charge.
If you are supplying a service subject to the reverse charge, you must show all the information that you would typically include on your VAT invoice.
You should also:
● Make it clear on the invoice that the reverse charge applies
● Make it clear that the customer is required to account for the VAT
● State how much VAT is due (or the rate of VAT if the amount cannot be shown)
Under the VAT Regulation 1995, you must include the reference ‘reverse charge’ on the invoice. So, you might include the wording ‘Reverse charge: Customer to pay the VAT to HMRC’ as an example.
By now, you should know whether the VAT reverse charge applies to the services you provide. However, if you are unsure or don’t know whether you should be the recipient of the reverse charge, you should seek professional guidance. Call the HMRC for advice or speak to one of our accounting specialists. This is better than assuming the reverse charge does not apply, although you should let the HMRC know as soon as possible if mistakes are made.
Further Guidance On The VAT Reverse Charge
According to GOV.UK, you must use the reverse charge if you’re VAT registered in the UK and supply building and construction services. The reverse charge applies when:
- Your customer is also registered for VAT in the UK
- Payment for supply is reported within the CIS
- The services you supply are standard or reduced rated
- You’re not an employment business supplying staff or workers
- Your customer hasn’t indicated that they are an end-user ( a VAT registered customer who has no intention of making further supplies of construction)
Significant changes may be needed to ensure you’re compliant with the regulations surrounding the VAT reverse charge. For example, you may need to train your employees on invoicing and identifying the relevant CIS contracts. In addition, your accounting and bookkeeping systems may need to be changed or modified to cope with your new invoicing obligations. And you may need to stop using Cash accounting and the VAT Flat rate scheme.
For advice on all of these matters, get in touch with our team. We offer a wide range of accounting and tax services, including those related to those in the building trade. If you’re unsure about anything, we have said here, give us a call, and feel free to talk to us about any other issues you may need help with when it comes to your accounting.
For more comprehensive information on VAT reverse charges, check out HMRC’s VAT reverse charge technical guide.