VAT Construction Domestic reverse charge
From 1 March, 2021, there will be a change to the way VAT on building and construction services is collected.
VAT Domestic Reverse Charge is applicable to supplies of labour and associated materials that fall within the Construction Industry Scheme (CIS) between subcontractors and their contractors. In this new regime, VAT is not charged on sales invoices from subcontractors but is treated as ‘reverse-charged’ in the VAT return of the contractor.
For example:
Contractor ABC purchases VAT standard rate labour and material supplies, valued at £1,000 (excluding VAT) from sub-contractor XYZ:
- Sub-contractor XYZ will not charge VAT on the invoice but state that it is reverse charged.
- Contractor ABC will pay £1,000 to sub-contractor XYZ (they will not pay VAT to sub-contractor XYZ). Note: this £1,000 could be subject to CIS deduction.
- The contractor ABC will include output VAT of £200 (£1,000 x 20% VAT) in their VAT returns submitted to HMRC in box 1 and also include input VAT of £200 in box 4 of their VAT return (assuming ABC can recover all of its VAT). The £1,000 will appear in their box 7.
Remember, you need to ensure that CIS is separately deducted as required from your invoice, irrespective of VAT treatment.
Exceptions
If the supplies are for an end user (and you have written confirmation), then the VAT Domestic Reverse Charge will not apply and VAT will be charged in the normal way.
VAT is due when a VAT invoice is issued, or payment is received, whichever is earlier.
For invoices issued for specified supplies that become liable to the reverse charge, the VAT treatment for invoices with a tax point:
- before 1 March 2021 – the normal VAT rules will apply and you should charge VAT at the appropriate rate on your supplies
- on or after 1 March 2021 – the domestic reverse charge will apply
Remember:
- If you send an invoice after 1 March, 2021, to someone other than an end user, and the VAT is stated on the invoice, this could result in the payment of your invoice being delayed and as a result, it may affect your cashflow.
- If you incorrectly pay VAT on a supplier’s invoice and the reclaim is blocked by HMRC, you may have difficulty reclaiming these amounts from the supplier.
Transitional period guidance issued by HMRC
Transitional One – Based on Normal Invoices issued for supplies
| Date the invoice was raised | VAT treatment |
|---|---|
| Before 1 March 2021 | Normal VAT rules |
| On or after 1 March 2021 | Domestic reverse charge |
Transitional Two – Based on Self-billed invoices and authenticated tax receipts
| Date entered in customer’s accounting system | Date payment made | VAT treatment |
|---|---|---|
| Before 1 March 2021 | On or before 31 May 2021 | Normal VAT rules |
| Before 1 March 2021 | On or after 1 Jun 2021 | Domestic reverse charge |
| On or after 1 March 2021 | On or after 1 March 2021 | Domestic reverse charge |
If you need further guidance on this, please get in touch with your account manager, or, for a more detailed brief, click here.
