HMRC has introduced a VAT reverse charge for construction services from 1 October 2019.
This is a major change to how VAT is collected in the building and construction industry.
You are likely to be affected if you buy or sell construction services under the Construction Industry Scheme (CIS).
The following link will give you an in-depth explanation https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services.
For a summary, see below:-
Where the reverse charge applies, it is the customer who will now account for the output vat due.
The reverse charge will only apply if both the customer & supplier are vat registered & the payments have to be reported through CIS.
The reverse charge applies where the tax point is after 1 October 2019.
The following will help determine whether you should use the reverse charge:-
Is the payment for construction services within the scope of the construction industry scheme? No -> Normal Vat Rules Apply
Yes – >Is the supply of ‘specified construction services’ for CIS?
No -> Normal Vat Rules Apply
Yes->Are both the supplier and customer registered for VAT?
No -> Normal Vat Rules Apply
Yes->Is the supplier an employment business supplying labour only services where the workers come under the control and direction of the customer?
Yes -> Normal Vat Rules Apply
No->Is the customer an *‘end user’ or an **‘intermediary user’?
Yes -> Normal Vat Rules Apply
No->VAT Reverse Charge applies.
*For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.
**Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users. To be connected or linked to an end user, intermediary suppliers must either share a relevant interest in the same land where the construction works are taking place, or be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006
Example
A typical construction transaction which will be caught after 1 October is as follows: Subcontractor Steve has done £2,000 of decorating work (including materials) for Contractor Clive – the latter will invoice the building owner for the project in question. Steve’s work is captured by the new rules because it is a builder-to-builder supply.
Current procedures
Currently, Steve charges Clive £2,000 + £400 VAT and includes £400 on his VAT return as output tax (Box 1) and the net sale of £2,000 in Box 6. Clive pays him £2,400.
Neither Steve nor Clive use the flat rate scheme.
Clive will claim input tax of £400 in Box 4 of his VAT return and record the net expenditure of £2,000 in the inputs Box 7.
New rules
From 1 October 2019, Steve will invoice Clive for £2,000 with no VAT included, noting on his invoice that Clive must deal with the VAT on his own VAT return by doing the reverse charge.
The key point with the new rules is that the same boxes will be completed overall but the Box 1 entry just moves from Steve’s VAT return to Clive’s return – that is the only change.
This is because Clive will pay Steve just £2,000 from 1 October and not £2,400, so Steve has no VAT money to include on his return.
Overall, HMRC is still receiving Box 1 and Box 4 entries for £400 and Box 6 and Box 7 entries for £2,000 ie the status quo.