The Construction Industry Scheme (CIS) VAT domestic reverse charge, which has been delayed twice due to Brexit and the Coronavirus pandemic, will be introduced in the UK from 1 March 2021.
Currently, it is the VAT registered supplier’s (subcontractor’s) responsibility to account for output VAT on their sales invoices and pay this over to HMRC through their VAT Return. The introduction of the VAT domestic reverse charge (DRC) will shift this responsibility to the VAT registered customer (contractor).
For construction services affected the VAT accounting requirements of the supplier and customer will be as follows:
- The supplier will issue an invoice to the customer showing all the information required on a VAT invoice. The invoice should include a note making it clear that the domestic reverse charge applies and that the customer is required to account for the VAT.
- The invoice should also clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown.
- VAT should not be charged to the customer.
- The related VAT Return will show the net value of the sale but no associated VAT.
- If the customer pays for the service before an invoice is raised, then the sale should be accounted for on the date of receipt of payment.
When a customer receives a service from a supplier which is subject to the reverse charge:
- The VAT should be included in box 1 of the VAT Return.
- The VAT should be simultaneously recovered by including it in box 4 of the VAT Return.
- The net value of the purchase should be included in box 7 (purchases). No entry should be made in box 6 (Sales).
- The service should be accounted for on the date you make the payment, unless the supplier has already issued a tax invoice in which case the VAT should be accounted for using the date of the invoice.
The reverse charge will need to be applied when the following conditions are met:
- The supply consists of construction services under the scope of CIS.
- The supply is subject to VAT at the standard or reduced rate (20%/5%).
- The services supplied are between a UK VAT registered customer and a UK VAT registered supplier.
- The customer and the supplier are registered for CIS.
- The customer intends to make an onward supply of construction services to another party (excluding end users and intermediary suppliers – see below for further detail).
The reverse charge will not apply to taxable supplies made to the following customers:
- Non-VAT registered customers.
- ‘End Users’ i.e. a VAT registered customer who is not planning on making an onward supply of construction services.
- ‘Intermediary suppliers’ i.e. parties that are connected or two companies within the same group.
Suppliers of construction services to either end users or intermediary suppliers should ensure that they receive confirmation of the customer’s status in writing. HMRC will apply a light touch in dealing with any errors made in the first 6 months as long as the errors are genuine and made in good faith.
You cannot use the cash accounting or flat rate VAT schemes for supplies of construction services which are subject to the reverse charge. Please speak with a member of our team if you require further guidance on this.
Accounting software hasn’t, as yet, been updated for the new DRC system however most of them already have the ability to deal with other forms of Domestic Reverse Charge. You should ensure that you are using the latest version of your accounting software so that this reflects any software updates relating to the VAT reverse charge.
Samantha Sanders ACCA is a Senior within the Business Services
Team at A C Mole & Sons Taunton
office and regularly assists clients with VAT queries. She can be contacted on 01823 624450 or SSanders@acmole.co.uk