The Construction Industry Scheme (CIS) VAT reverse charge applies to construction services from 1 March 2021. Here is a simple guide to the new rules:
What is it?
The new reverse charge will apply to supplies of construction work from 1 March 2021 but only to supplies made business to business.
The reverse charge will apply when all the following are met:
- The supply for VAT consists of services and materials that fall under the CIS scheme. For more details
- The supply is subject to standard or reduced-rate of VAT
- Where both the supplier and customer are registered for UK VAT and CIS
- The customer intends to make an ongoing supply of construction services to another party
- The 2 parties cannot be connected
The CIS reverse charge does not apply :
- Where the supply would normally be VAT exempt
- Where supplies are not covered by the CIS, unless linked to such a supply
- Where only staff are supplied e.g. as an agency where the supplying business does not oversee the construction
- Where your customer is not VAT registered
- Where your customer is an end user or intermediary supplier. For end users you should get written confirmation on paper, in an email or in a contract. For more details.
Other situations to note
- If there is a reverse charge element in a supply, then the whole supply will be subject to the domestic reverse charge
- If there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services
- If the reverse charge applies to more than 5% of contracts (by volume or value) with a sub-contractor, then the reverse charge may be applied to all the contracts
- If a customer has not given written confirmation of their end user or intermediary supplier status, the supplier must assume that the reverse charge applies and will not charge VAT to the customer
Things to consider
- Does your software cope with reverse charges? We are able to help you with solutions if your software does not.
- You may not be able to use flat rate or cash accounting
- Your cash flow may be affected
- Consider including new terms on your quotes or terms and conditions to state you will treat all customers as end users unless they tell you otherwise. This places the responsibility onto them.
Example: How the CIS reverse charge works
Pete the plumber is VAT registered. He is supplying materials and labour to Builder A, who is also VAT registered. Builder A is supplying his own services to Company B who is a property developer and is VAT registered. Company B sells developed properties to other businesses.
- Pete would previously, invoice Builder A £60,000, comprising of his £50,000 bill for materials, labour and works, plus £10,000 in VAT .
Under the new scheme, he will invoice £50,000. The invoice must state ‘the CIS reverse charge applies’ and that the rate of VAT is 20%.
- Builder A pays Pete £50,000. He then includes the output and input VAT of £10,000 on his VAT return.
- Pete does not include the output VAT in his accounting records.
- Pete will now receive £10,000 less than previously which may affect his cash flow especially if he is used to using the money in the short term to fund materials for the job.
- Pete includes £50,000 in box 6 of his VAT Return. He does not add VAT to box 1.
- Builder A must also consider the reverse charge. Is company B, his customer, going to be the end user? He may wish to use this flowchart supplied by HMRC.
Treatment of existing contracts to be ready for 1 March 2021
The VAT treatment is determined for payments due on any supplies entered into your accounting system before 1 March 2021, but paid on or after 1 March 2021.
|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 June 2021||Domestic reverse charge|
|On or after 1 March 2021||On or after 1 March 2021||Domestic reverse charge|
For contracts starting after 1 March 2021, you should decide whether the reverse charge applies from the start of the contract.
What to include on your invoices
Suppliers must show all the information that is normally required on a VAT invoice and the following
- The invoice must make clear that the Construction Industry Scheme VAT reverse charge applies and that the customer is required to account for the VAT
- No VAT is charged on the invoice
- It should state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but that VAT should not be included in the amount charged to the customer
Under the VAT Regulation 1995, invoices for services subject to the reverse charge where the customer is liable for the VAT must include the reference ‘reverse charge’. Here are some examples of wording that meet the legal requirement:
- Reverse charge: VAT Act 1994 Section 55A applies
- Reverse charge: S.55A VATA 94 applies
- Reverse charge: Customer to pay the VAT to HMRC
For HMRC’s example click here.
For the full HMRC guidance read on.