New Domestic VAT Reverse Charge Introduced by HMRC
The Domestic VAT Reverse Charge is a new anti-fraud measure for VAT within the Construction Industry Scheme (CIS) being set up by HMRC.
From 1 October 2019, the main contractor will be liable to account for VAT to HMRC in respect of purchases rather than the sub-contractor, meaning VAT cash will no longer flow between businesses.
In other words, the main contractor will pay the VAT element of the supply it receives to HMRC direct instead of sending it to the sub-contractor first.
Under the new rules, a VAT registered business (sub-contractor) that supplies certain construction or building services to another VAT registered business (main contractor) for onward sale will be required to issue an invoice stating that the service is subject to the domestic reverse charge.
The VAT registered main contractor will then need to account for VAT due on supply to the end customer via its VAT Return in the normal way.
On the sub-contractor’s VAT return the VAT on the supply (sale) will be entered on both an Output and an Input. In other words they will cancel each other out.
The sub-contractor will no longer be paying the VAT over to HMRC because they will not be receiving it from the customer.
The new rules do not apply to zero-rated supplies of construction services, only to Standard and Reduced Rate.
The key features of the changes are:
- Only standard rated and reduced-rated supplies are affected by the changes.
- The reverse charge will only be applicable on ‘specified services’ that fall under the reporting requirements of the Construction Industry Scheme (CIS).
- The reverse charge only affects ‘specified supplies’ made between VAT registered businesses.
- If your invoice consists of some CIS and some non-CIS supplies, the whole supply will be subject to the reverse charge.
- You will account for VAT in the normal way if you are making the supply to an ‘end user’.
- Sub-contractors are likely to become VAT repayment traders.
Sub-contractors will need to make sure they know the status of their customers:
- End user
- Main contractor
Other points to note:
- Work on new build dwellings which is zero-rated will be unaffected, whether you are a sub or main contractor.
- Users of the Flat Rate scheme should not include reverse charge supplies in their Flat Rate turnover. If a significant number of their supplies are subject to the reverse charge it may no longer be appropriate to use the scheme as many sub-contractors will receive refunds on a regular basis.
- Should they receive any reverse charge supplies whilst on the flat rate scheme, again these should be dealt with outside the scheme, meaning the business will account for the VAT to HMRC, but will be able to credit themselves with the input tax.
- HMRC have said they will apply a soft touch approach towards errors for the first 6 months whilst traders get used to the changes and they have now published and further detailed guidance is available – VAT: domestic reverse charge for building and construction services.