The beginning of March saw a major change in the way VAT is handled by contractors and sub-contractors in the construction industry with the introduction of the VAT domestic reverse charge (VDRC).
The VAT domestic reverse charge for building and construction services, finally came into force on 1st March 2021 (its introduction having been delayed twice, firstly because of Brexit and then again because of Covid) and is a change in how VAT is accounted for on certain kinds of construction services in the UK, along with the building and construction materials used directly in those services. However, its worth noting that the VDRC doesn’t apply to building and construction materials supplied separately and independently of any construction services.
Essentially therefore, the VAT reverse charge for is an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors.
The scheme means those supplying construction services to a VAT-registered customer no longer have to account for the VAT themselves. Instead, the customer accounts for the VAT (that is, it’s considered input tax for them, as if they’ve made the supply to themselves). In even simpler terms, for services they provide, sub-contractors require the contractor employing them to handle and pay the VAT directly to HMRC. The payment received is for the cost of the work done (plus materials used), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice.
Subcontractors invoicing contractors for work should first of all check with them to confirm the application of the VDRC and then ensure that the invoice issued clearly states that the VDRC applies as in the example below :-
HMRC says it will combat fraud, whereby construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill. By moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible. The introduction follows the success of similar, although not identical, reverse charge schemes for the likes of mobile phone and computer chip retailers, and wholesale energy suppliers.
The VDRC only applies to VAT-registered businesses who are supplying/receiving services that are reported under CIS. In other words, it applies to services supplied between the majority of construction sub-contractors and contractors in the UK. If your CIS business is the recipient of construction services, and receives an invoice with the reverse charge applied, then you account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.
If your business is not VAT registered then the reverse charge can’t be applied to you, and standard VAT rules apply for the supplier (so they will charge you the VAT and account for it as usual). If you’re not VAT registered, you should make it clear to the supplier in writing.
Crucially, reverse charges don’t contribute to a company’s potential VAT threshold. So if you aren’t registered for VAT then any attempt to apply the reverse charge won’t push you over the limit.
Notably, the VDRC also doesn’t apply to end users, such as the people who use a building that’s been constructed by the provided services, and nor does it apply to some of those connected to them, such as landlords or tenants.
For sake of clarity, HMRC have put together a couple of flow charts to help contractors and sub contractors decide whether the reverse charge applies to them :-
Most accounting software packages have been updated to account for the introduction of the VDRC. In Quickbooks for example, a number of new VAT codes have been introduced which if applied to the relevant transactions will ensure they end up in the correct box on the VAT return.