Domestic reverse charge for building and construction services

What is it?

The domestic reverse charge is a change in the way CIS registered construction businesses handle and pay VAT.

It has been introduced as an anti-fraud measure, designed to cut down on “missing trader” fraud, where companies received high net amounts of VAT from their customers but have no intention of paying the VAT to HMRC.

When does it come into effect?

This comes into force on 1st March 2021, and will impact all invoices raised after this date.

Who does it impact?

Anybody within the building and construction industry who is VAT registered.  This applies to both standard and gross CIS.  It applies to both standard and reduced rate supplies, but not zero-rated supplies.

What should I do when I issue invoices to customers?

For all invoices that you raise you must follow HMRC’s flow chart to see if you should apply standard VAT rules to your customers or if you should apply the domestic reverse charge rules.

If the flow chart shows that you should apply normal VAT rules you will raise your invoice in the usual way applying the appropriate rate of VAT, and prepare your VAT return in the normal way.

If the flow chart shows that you should apply the reverse charge rules, you should raise your invoice applying these rules.  Your invoice should show the rate and or amount of VAT that would usually be applied to the invoice, but that the domestic reverse charge has been applied.  Meaning that your customer will not pay the VAT to you but will instead pay the VAT due directly to HMRC on their VAT return.    These rules apply to the whole invoice, including any materials or any elements outside of the scope of CIS, if any of the work meets the criteria.

On your VAT return you will only include the value of your sale, you will not include any sales VAT.

What if my customer is an end user?

You should obtain written confirmation from your customer that they are the end user for the project that you are invoicing.  This should be retained for your records to show that you applied the appropriate VAT rules.

If they have confirmed in writing that they are the end user you should apply the normal VAT rules.

What should I do if I receive invoices from subcontractors?

If your subcontractor is VAT registered they should follow the same procedure to ensure that they are applying the correct rules.  However, it is your responsibility as the customer to ensure that they are applying the VAT to your invoice correctly.  If you are unsure you should query the treatment applied with your contractor.

You can use HMRC’s flow chart to check what VAT rules should have been applied if you are not sure.

If any of the work being invoiced to you is within the scope of CIS and you are not the end user, then they should raise their invoice showing the rate of VAT that would normally have been charged, stating that domestic reverse charge rules apply.  When you include this on your VAT return you will pay the VAT over to HMRC that would normally have been applied to the invoice, and at the same time reclaim the VAT from HMRC in the usual way.

If the work provided falls outside of the domestic reverse charge rules they will issue an invoice in the normal way, including the VAT.

This will be included on your VAT return in the usual way.

What if I am the end user?

If you are the end user you should confirm this in writing to your subcontractor.

How will this affect my business?

If you usually rely on the VAT received from your customers for cashflow purposes until it needs to be paid to HMRC, you may find that your cashflow is impacted as you will no longer be receiving this money if the domestic reverse charges apply.  You may wish to look into other methods of finance.

If you are no longer paying VAT over to HMRC as you are not collecting it from your customers, this may result in your regularly receiving repayments from HMRC.  If this is the case you may wish to look to changing to monthly returns to speed up the process of receiving your refund.

What if I use the flat rate or cash accounting scheme?

Invoices that fall within the domestic reverse charge rules are outside the scope of the cash accounting and flat rate schemes, and must be accounted for on the same basis as the standard scheme, so included in the return based on the invoice date not the date payment was made for example.  Therefore, if you have a high proportion of invoices that fall within the domestic reverse charge and currently operate using either of these schemes, you may wish to look at changing to the standard scheme.

Software

The main software providers (Sage, Xero, Quickbooks, Free Agent) are currently updating their software to accommodate these changes and assist with compliance.  If you already use software to raise your invoices and prepare your VAT returns, I would suggest checking the software providers website for guidance on how to raise your invoices and what tax codes to apply. 

If you are not currently using a software package to raise your invoices or prepare your VAT returns I would strongly recommend that you consider doing so from 1st March.

HMRC’s guidance

I would strongly recommend that you read through HMRC’s guidance and watch their webinar.

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#completing-your-vat-return

https://register.gotowebinar.com/recording/6837484991002392071?source=Gov

Xero

https://www.xero.com/uk/resources/domestic-reverse-charge-vat/

https://www.xero.com/content/dam/xero/images/UK/smarter-starter/domestic-reverse-charge-drc-guide.pdf?logActivity=true

Quickbooks

Quickbooks have advised that they will be emailing their customers nearer the time, setting out details of how their system will work with the new changes.

Please note that this includes advice that is generic in nature and should not be interpreted as legal advice.  Please Contact Us for specific and confirmed tax planning.

The VAT domestic reverse charge was initially due to come into force in October 2019, but was postponed until October 2020 to allow businesses more time to prepare.  A decision was then made in June 2020 to further delay the start date until 1st March 2021 due to pandemic.  Whilst there is no current discussion about postponing the change again, you should keep up to date with any announcements from HMRC in relation to this.

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