Construction Industry - VAT reverse charge

The changes to be implemented in October 2020.

The Change

The VAT reverse charge is the change in the way VAT is collected in the building and construction industry. It is the major change as from Oct 2020, the customer receiving specified construction services has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT under the normal rules of recovery.

To whom the changes will apply

This change will be applied to the

  • individuals and the businesses registered for VAT in the UK.
  • anyone who is receiving or supplying the specific services that are reported under the CIS will be affected.
  • this will not be applied to the consumers or final customers (end users) of building and construction industry

However, consumers or final customers (end users) who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them.

The consumers or final customers:

For reverse charge purposes the consumers and the final customers are called the end users and VAT reverse charge will not apply to them. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services, 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.

CIS is a scheme under which the contractors deduct the money from the subcontractor's payment and pass it to HMRC. These payments are then counted as the advance payments towards the subcontractor's tax and NI. To find more about CIS scheme go to HMRC website: https://www.gov.uk/what-is-the-construction-industry-scheme

As a subcontractor, you should ask the customer if they are an end user. The customer will have to inform the supplier that they are end users and that VAT should be charged in the normal way instead of being subject to the reverse charge.

What you need to do as a Contractor

If you are a contractor you need to review all your contracts with your subcontractor to see if the reverse charge will apply to the services you receive under the contract.

What you need to do as a Sub contractor

You need to review the contracts to see if the VAT reverse charge is applied: You need to look at the services that you are providing and also to see to whom you are providing the service.

Please note that if any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.

If there is a doubt as to if the service should be subject to reverse charge remember the rule of thumb: as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.

What I Need to do to be ready for the change:

Before the implementation of the change make sure you are confident with the following:

  • checking whether the reverse charge affects your sales, purchases or both
  • make sure your accounting systems and software are updated to deal with the reverse charge
  • considering the changes, it will have on your cashflows
  • making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

If you need an expert advice of an accountant, please do not hesitate to call Taxaccolega Accountant in Croydon on 02081270728.

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