What is the Construction Industry VAT reverse charge?

Posted: Jan 18, 2021
Expert:
Adrian Young

If your business operates in the Construction Industry Scheme (CIS) and you’re VAT-registered, you need to be aware of VAT changes scheduled to be introduced on 1 March 2021 which may affect your business.

The Domestic reverse VAT charge for building and construction services was first introduced on 1st October 2019. However, it was delayed for another year until October 2020 as many businesses were not ready to implement the changes required. 

The Domestic reverse charge has since been delayed until 1st March 2021 due to the impact of COVID-19 on the construction industry.

This reverse charge means that customer who get supplies of construction or building services will be responsible for the VAT due, which the supplier is responsible for at present. 

What does this mean moving forward?

From 1 March, supplies between VAT-registered businesses that are also registered for the CIS scheme should be made without VAT, where the conditions are met.

Instead the customer is now required to deal with the VAT (akin to the reverse-charge mechanism that you may have seen in cross-border scenarios).

This has some potentially significant impacts for business, not least on cashflows where subcontractors rely on receiving their invoices including VAT and then only pay the output VAT to HMRC on later submission of the VAT return.

Terms & Conditions

The reverse charge applies where all of the following apply:

  1. The supply consists of construction services and materials.
  2. It is a standard or reduced-rate supply.
  3. It is a supply between a UK VAT registered supplier and UK VAT registered customer.
  4. Supplier and customer are registered for CIS.
  5. The customer intends to make an ongoing supply of construction services to another party.
  6. The supplier and customer are not connected.

It does not apply to any of the following supplies:

  1. Supplies of VAT exempt building and construction services.
  2. Supplies not covered by CIS, unless linked to such a supply.
  3. Supplies of staff or workers.

It also does not apply to taxable supplies made to:

  1. A non-VAT registered customer.
  2. VAT registered customers who do not make further on-going supplies of construction (end-users).
  3. Connected suppliers such as landlord and tenant, or two companies in the same group.

For guidance or support please contact Tax Partner Adrian Young by emailing adrian.young@hurst.co.uk or complete the form below.