HMRC have announced that the start date for the CIS Domestic Reverse Charge for VAT has been deferred for 12 months. The new legislation regarding the treatment of VAT in the construction industry will now take effect from 1 October 2020.
If you are a contractor or sub-contractor in the construction industry, the new rules may be relevant to your business. We have set out guidelines below about the changes to ensure that you are ready before they are implemented next year. If you have any further questions, please don’t hesitate to contact us.
Will the domestic reverse charge apply to my business?
The rules will apply to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). The domestic reverse charge does not apply for services supplied to non-VAT registered individuals or businesses, so work done for homeowners/domestic users should be invoiced in the standard way.
How does the domestic reverse charge work?
The domestic reverse charge means
that sub-contractors will require their engaging contractor to handle and pay the VAT directly to HMRC for services they provide that are in the scope of CIS. The contractor receiving the specified service has to pay the VAT to HMRC instead of the sub-contractor. In turn, the contractor
can recover the VAT (subject to the normal VAT recovery rules) i.e. the net effect
being zero. Below, we have outlined some practical points for either the contractor or sub-contractor to be aware of:
Contractor:
Review your contracts with sub-contractors to decide if the reverse charge will apply to the services you receive.
- Account for the VAT on transactions with sub-contractors differently.
- Check your sub-contractor’s invoice to ensure it states that the invoice is subject to the reverse charge.
- Include on your VAT return in both the output VAT (box 1) and the input VAT (box 4), invoices received from sub- contractors under the reverse charge.
- Communicate to your VAT-registered sub-contractors that you will be paying the net amount on the invoice.
Sub-contractor
- Confirm with your contractor that the reverse charge will apply, including confirming if the customer is an end-user.
- When making sales on which reverse charge accounting applies, you must show all the information normally required to be shown on a VAT invoice. You must also annotate the invoice to make it clear that the reverse charge applies and that the contractor is required to account for the VAT.
- Take steps to mitigate the cash flow impact of not receiving the VAT from the contractor.
- You could be a repayment trader rather than making payments to HMRC, due to not paying over the output tax. If this applies, it may be worth switching to monthly returns from 1 October 2020 to speed up VAT repayments from HMRC.
Click here for the published HMRC guidance:
https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
Click here for the HMRC’s official announcement:
Please contact your Rothmans branch if you have any questions on the rules before they are introduced next year or would like to discuss any issues in more detail.
