VAT Reverse Charge for CIS

Update: On 6 September 2019 HMRC published a policy paper announcing the delay of the reverse charge for the construction industry. The changes have already been pushed back once and were due to begin 1 October 2020 but from June 2020 it has been announced that a further 5 month delay will be applied. The reverse VAT charge is now planned for March 2021.

VAT changes are coming into place from 1 October for those who work under the Construction Industry Scheme (CIS). The changes are being implemented in order to cut down on “missing trader” fraud which is responsible for significant amounts of Vat being lost to HMRC. The construction industry has been targeted as they are considered to be a high-risk sector. Suppliers are easily able to charge VAT on services, but then disappear without paying the money received for VAT to HMRC. In a bid to combat this type of tax evasion, the government are introducing a reverse charge for construction workers which will change how VAT will be processed.

How does the reverse charge work for CIS?

As of 1 April 2024, businesses which earn a turnover of £90,000 or more must become VAT registered (although you can voluntarily choose to be VAT registered if your turnover is less). Those who are VAT registered must charge VAT on top of their fees and this is paid to HMRC. Where traders supply goods and/or services to another VAT registered business, the receiving business is able to claim back the VAT paid from HMRC.

Under the new reverse charge rules, suppliers will no longer charge VAT between them and other VAT registered contractors (unless they are only supplying goods). They must still issue invoices which state the VAT but specify that it is under reverse charge. The contractor receiving the services then becomes responsible for accounting for the VAT to HMRC but are also still able to claim this back. By moving the responsibility of charging VAT to the receiving contractor, it is much less possible for them to evade accounting for VAT.

Who does the reverse charge rule apply to?

The reverse charge only applies to VAT registered contractors who are also registered for CIS. This will therefore only be relevant to construction contractors and sub-contractors. If you use CIS but are not VAT registered then you will need to make this clear to the supplier in writing and they should charge you VAT in the normal way.

If you are considered an “end user” such as the person who the construction work is being completed for (including landlords or tenants) then the reverse charge does not apply to you, regardless of whether you are VAT registered or not. VAT should be reported in the normal way for end users.

What construction services does the reverse charge apply to?

It is important to remember that where only goods (without services) are supplied then the reverse charge does not apply and the normal VAT process stands. Where goods as well as services are supplied then VAT for both falls under the reverse charge rule. HMRC specifies services which are included for the reverse charge rule:

• construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
• construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
• installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
• internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
• painting or decorating the internal or external surfaces of any building or structure

What construction services do not apply for the reverse charge?

HMRC also states that the following does not fall under the reverse charge where they are supplied on their own:

• drilling for, or extraction of, oil or natural gas
• extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose
• manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
• manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
• the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
• the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature
• sign writing and erecting, installing and repairing signboards and advertisements
• the installation of seating, blinds and shutters
• the installation of security systems, including burglar alarms, closed circuit television and public address systems

This list is not exhaustive and where supplied alongside qualifying services (see above) then the whole supply will be subject to the reverse charge.

How is the reverse charge going to affect me?

In practice, the reverse charge is merely an administrative change and shouldn’t have any overly adverse impact on any parties involved. In fact, it can provide incremental cash flow benefits.

For sub-contractors (supplier of services)

You continue creating invoices but should include one of the following terminology:

• Reverse charge: VAT Act 1994 Section 55A applies
• Reverse charge: S55A VATA 94 applies
• Reverse charge: Customer to pay the VAT to HMRC

You may become a repayment trader which means that instead of being required to pay VAT (because the contractor will now be responsible for that), you are owed VAT payments from HMRC. In this case we would recommend changing to monthly VAT returns in order to receive payments more regularly.

For contractors (purchaser of services)

You will now be required to account for reverse charge VAT invoices on your VAT returns. It will be important for you to double check you are doing so correctly in order to ensure you do not overpay or underpay VAT. Similarly, as a result you may also gain a cash flow benefit as you will not need to physically pay VAT to a sub-contractor and wait until your VAT return to receive the money back. The VAT amount will simply be netted off in your VAT return.

For any help with VAT returns or completing your Self-Assessment Tax Return under CIS please get in touch with us for an introductory consultation.