CIS VAT Reverse Charges
Posted on 10th March 2021 at 12:46
From 1 March 2021 the domestic VAT reverse charge must be used for some supplies of building and construction services.
HMRC states that the purpose of the new reverse charge rules is to reduce VAT fraud within the construction industry. Previously, it has been possible for builders to charge VAT on sales invoices to their builder customers, but not declare that VAT to HMRC. Going forward, builders will not charge VAT. Instead, their customers will self-account for the VAT on their own VAT returns, in the form of a reverse charge entry.
The reverse charge will only apply to work carried out for other builders, where the builder sells on the work in question as part of an onward supply. The reverse charge will not apply if the builder receiving services confirms they are either an end user, or intermediary supplier. In these circumstances, normal VAT accounting rules will apply to sales invoices.
End user - the building services provided by the first builder are not subject to an ‘onward supply’ being made by the second builder. For example, the services might relate to work carried out at the head office of the second builder, or a buy-to-let property that they rent out to a tenant.
Intermediary supplier – this is a business that is registered for both CIS and VAT that is connected or linked to end users. For example, the two entities are in the same corporate group or undertaking. There is also a link if the intermediary supplier and end user both have a relevant interest in the same land where the work is taking place. For example, a landlord and tenant arrangement. So, even though an intermediary supplier is making an onward supply of construction services to the end user, the supplies it receives from other builders will be subject to normal VAT rules rather than the reverse charge.
The reverse charge will also apply to materials supplied by builders as part of their work, irrespective of whether separate sales invoices for labour and goods are raised.
You will need to adjust your accounting procedures to ensure that sales invoices do not charge 5% or 20% VAT if the reverse charge applies.
If you are supplying qualifying services, you will only invoice their builder customers for the value of the labour and materials, exclusive of VAT. You should include a note on your sales invoice confirming that the work is subject to the reverse charge. HMRC’s suggested wording is “Reverse charge – customer to pay the VAT to HMRC.”
Your sales invoice should specify the amount of VAT to be accounted for by the customer or, as a minimum requirement, the rate of VAT that applies to the work in question.
BUILDERS SUPPLYING CONSTRUCTION SERVICES:
You must confirm that your customers are registered for both CIS and VAT. You can ask for sight of the customer’s VAT registration certificate issued by HMRC or use HMRC’s VAT number checker service on their website: www.gov.uk/check-uk-vat-number
CUSTOMERS PURCHASING BUILDING SERVICES:
Make sure that you are not charged VAT by a builder when the reverse charge should apply. The solution to overcharged VAT is to ask the supplier for a VAT credit and still carry out the reverse charge.
You should also check that the work comes within the scope of the CIS and that the supplier is providing building services and is not an employment business only providing labour. Supplies by an employment business are subject to normal VAT rules.
Customers are required to advise their builders if they qualify as either an ‘end user’ or ‘intermediary supplier’ for the work in question.
It is the responsibility of the builder receiving services to tell their suppliers if they are an end user or intermediary supplier for the work in question. However, HMRC makes the suggestion that suppliers should include wording in their contracts to alert the customer to this issue: “We will assume you are an end user or intermediary supplier unless you say you’re not.” This means that the supplier is adopting the cautious approach of charging VAT as the default option, reducing the risk of an HMRC assessment being raised for underpaid output tax.
In most cases, if some work on a sales invoice is subject to the reverse charge, then it applies to the full invoice amount. The exception is if the reverse charge work is 5% or less than the total invoice value.
PLANNING AND COMPLIANCE TIPS:
The new reverse charge rules could have significant implications for construction businesses of all sizes.
Cash flow challenge – If you have been using VAT money to support your working capital needs, this loss will need to be considered.
Flat rate scheme – Sales that are subject to the reverse charge are excluded from the VAT returns of suppliers who use the FRS. On the basis that scheme users cannot claim input tax (unless it relates to capital expenditure on goods costing more than £2,000 including VAT), it might be worthwhile withdrawing from the scheme and reverting to normal VAT accounting from 1 March 2021. There is no problem leaving the scheme part way through a VAT period.
Penalties – HMRC has confirmed it will adopt a “light touch” in the first six months of the new rules, as long as builders “are trying to comply with the new legislation and have acted in good faith.”
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