VAT Domestic Reverse Charge for the Construction Sector

Next week will see the introduction of the new, VAT domestic reverse charge for those working in the building and construction industries. It is being introduced to help combat fraud within the construction sector, but what are the other ‘need to knows’? We’ve put together some key information for you.

What is it?

If you have previously been working within the Construction Industry Scheme (CIS), then the VAT reverse charge is essentially an extension of this. It will apply only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors. In simple terms, the new reverse charge with mean that for services provided, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.

The charge will apply to both standard and reduced-rate VAT supplies but not supplies that are zero-rated.

Who does it apply to?

The domestic reverse charge is expected to apply to the majority of contractors and sub-contractors currently working within the CIS. If your business is a recipient, and receives an invoice with the reverse charge applied, then you should account for the VAT as part of your overall input tax, as if you’ve charged it to yourself (hence the name!)

If your business is not VAT registered, then the new charge cannot be applied, and the supplier should adhere to the standard VAT process.

N.B. the domestic reverse charge does not apply to end users, for example people who use the finished building, landlords or tenants.

How can I check if it applies to my business?

HMRC has put together a checklist for sub-contractors. If you answer ‘yes’ to all the questions below, then the domestic reverse charge will apply.

1. Are any of the supplies you are making within the scope of the CIS?

2. Is the supply standard or reduced-rated?

3. Is your customer VAT registered?

4. Will your payment be reported under CIS?

5. Are you sure the customer is not an end user?

I’m still not sure if it applies to my business…

The best thing to do in this case is to speak to a qualified advisor such as ourselves. We can look at the details of your business and advise you on the varying nuances that could or could not impact your business. While HMRC has said they will go lightly on any mistakes made within the first six months of the charge being introduced, this charge still remains mandatory. In their own words: “provided the recipient is VAT registered and the payments are subject to CIS, it is recommended that the reverse should apply.”