Launched 1st March - Domestic Reverse Charge VAT Scheme

Changing the way Construction Businesses handle and pay VAT

Here, Amy, our newest team member will help to demystify this new legislation, how it could affect you and how we can help.

What is Domestic Reverse Charge VAT?

It is a legislation introduced on the 1st of March 2021, to change the way that CIS (Construction Industry Scheme) registered construction businesses handle and pay VAT.

Why is it being introduced?

It is being introduced to cut down on 'missing trader' fraud, where businesses receive large amounts of VAT from their customers but are not declaring on their VAT return and paying over to HMRC. 

Who will it affect?

It affects VAT registered construction businesses who supply or receive construction and building services within the CIS scheme. It means that the customer (contractor) will be responsible for the VAT due to HMRC, instead of the supplier (subcontractor).

The scheme does not apply to zero rated services, non-VAT registered subcontractors or services that fall outside of the CIS scheme.

What do you need to do as a CIS Subcontractor?

For invoicing purposes, if a CIS registered customer is being supplied with a standard or reduced rate service, their invoice will be subject to the reverse charge. This means that you will no longer charge VAT to your CIS customers, instead you will state that the customer is responsible for the VAT.

The domestic reverse charge will not be applied if your customer is an end user or intermediary (linked or connected to an end user). They will need to provide written confirmation of this to avoid the reverse charge being applied. 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.

What should I display on my Sales Invoice to a contractor?

In addition, to the standard information required on a VAT invoice, you must now also add the following:

  • Make a note on the invoice, to make it clear that the domestic reverse charge applies, and that the customer is required to account for the VAT e.g., 'reverse charge: Customer to pay the VAT to HMRC.'
  • Clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer.

HMRC Invoice Example:

If you use an accounting software, such as Xero, to raise your sales invoices, this will need to be activated within your software and then it will automatically include the above, when using the standard template and associated Tax Rate. 

What do you need to do as a Contractor?

Where Standard or reduced rate VAT invoices are received from a CIS subcontractor, the domestic reverse charge will be applied, and VAT is not payable to the subcontractor. Instead, it is the contractor's responsibility to pay over the VAT to HMRC. The subcontractor should state on their invoice the applicable VAT rate that should be charged.

How will this affect my cashflow?

As a contractor, you will no longer be paying VAT over to your sub-contractors, so this will have a positive effect on your cashflow. However, as a sub-contractor, your customers will no longer be paying you VAT, which will reduce the gross value of payments coming into your business. It is important that you plan for the impact of this on your day-to-day cashflow.

How can we help?

We have 'spades' of experience and expertise in VAT and construction industry accounting and financial planning. We can help to guide you through the steps and take care of the administration too. Contact us for more information and a helping hand.

Tel:01626 610071 Email: admin@maltaccountants.co.uk