After several delays HMRC have now confirmed that the CIS VAT reverse charge will come into force on 1st March 2021, nearly 18 months after its original start date.
This new legislation effects VAT registered businesses working in the construction industry only. This anti-fraud measure represents a major change in the way that VAT is accounted for in the construction industry and could have significant cash flow effects (both positive and negative) for affected businesses.
VAT registered subcontractors will no longer charge VAT when they perform qualifying ‘construction operations’. The main contractor will instead pay the VAT over to HMRC on their behalf, but on the same return claim it back as input VAT. This is known as the ‘domestic reverse charge for construction operations’. The definition of construction operations is closely aligned to the work covered by the CIS scheme, but it does not include the supply of labour or workers.
The changes do not affect zero rated work e.g. work on new dwellings, but does apply to reduced rate (5%) and standard rate (20%) supplies.
In practical terms this means that NO VAT is charged by a supplier of services in the construction industry.
They will supply an invoice to their customer for the VAT exclusive amount and note on the invoice it is subject to the domestic reverse charge. This means VAT box 6 will have the same amount as before (i.e the NET sale figure), but no VAT will be accounted for in box 1. This is where the cashflow disadvantage may affect subcontractors. Until 28 February 2021, they may have invoiced and received £10,000 + £2,000 of VAT which they would not pay over to HMRC until their next VAT quarter, which could be up to 4 months later. In that period, they would have the use of £2,000 of output tax which they would not pay to HMRC until the next VAT return.
For each job the supplier should consider:
- Is the customer registered for CIS and VAT? If they are not registered for VAT then normal VAT rules apply.
- Does the work fall within the scope and is it subject to 5% or 20% VAT?
- Is the builder ‘selling on the services’ for the job? If the customer is the ‘end user’, VAT is charged as normal.
An end user is where the work does not relate to an onward supply of construction services, e.g. work on your own premises or buy to let property that you own.
- The VAT amount to be declared by the customer must be shown on the sales invoice or at least the rate of VAT and a statement that it is subject to the reverse charge. HMRC suggested wording is either ‘reverse charge – customer to pay VAT to HMRC’ or ‘No VAT charged – VAT Act 1994, S55A applies to this invoice’
If you account for sales on your VAT Return on a cash basis (i.e. when received) this can continue under this method as a supplier but not when you are a customer.
You should not accept a VAT charge from builders if the reverse charge applies to the job. You should account for the VAT as a reverse charge on your next VAT return. This is done (using example above) by including £2,000 in box 1 and box 4 of the VAT return and £10,000 in box 7. The only additional entry is the £2,000 in box 1. If you are an end user you should notify your supplier of this.
If you currently account for VAT on a cash basis this cannot continue with respect to VAT on the domestic reverse charge, this needs to be accounted for on the invoice date, as long as this is before payment.
Building materials supplied with labour are subject to the reverse charge and HMRC have specifically stated that you must not split the supply between labour and materials in order to avoid the reverse charge on the labour only invoice.
The finer detail
Employment agencies are exempt from the reverse charge and will charge VAT and this will be recovered as normal. Labour only construction services are still subject to the reverse charge but the supply of staff is not. HMRC guidance states the difference as follows:
- labour only construction services – the business supplying the labour will be responsible for overseeing the completion of the work carried out by the workers
- staff – the customer that receives the workers will be responsible for overseeing the completion of the work carried out
HMRC state the Distinction between employment businesses and labour-only sub-contractors as follows:
Supplies by labour only sub-contractors are subject to the reverse charge if the supplies are within the scope of Construction Industry Scheme and all the other conditions are met.
The supplies made by the employment business are not subject to the reverse charge even if those supplies are within the scope of Construction Industry Scheme.
The supplying business should be treated as an employment business if these features apply:
- the customer contacts the employment business and asks for X workers for Y days
- the workers are employed by or engaged by the employment business
- the employment business provides an hourly or daily rate for the workers
- a timesheet is used to record the hours and days worked
- the customer sends the signed timesheet agreeing the hours and days worked to the employment business
- the customer pays the employment business
- the customer’s site foreman or managers direct and control the works carried out by the workers
- the customer is responsible for the works carried out
The supplying business should be treated as a labour only sub-contractor if these features apply the:
- customer contacts a business and asks for a skilled labourer (for example, a bricklayer, electrician or plumber) to carry out specified services
- labourers are employed by or engaged by the business
- business provides a price for the works or agrees a measured rate per square metre
- supplying business is responsible for the labourer’s works
- supplying business is responsible for correcting any defects following completion of the works
- customer, or its representatives, agrees that the work has been carried out or certifies payment for the value of works carried out to date
The reverse charge applies to the services supplied by the business (if those services are within the scope of CIS) and VAT should not be charged on the invoices.
In advance of 1 March 2021, we would recommend that if you are deemed to be within the construction industry that you talk to us about how this will affect you in terms of cash flow and accounting records.
HMRC has a useful flow chart for suppliers to decide whether your supplies are deemed within the new regime which can be found at:
and for customers at:
Monthly VAT returns beneficial?
If the changes mean that you no longer charge VAT on your sales, you may find that each VAT quarter you are in a repayment position. It may be worthwhile considering changing your VAT return frequency to monthly in order to aid cashflow.
Software suppliers have been updating their packages in preparation for the change in order for the figures to appear in the correct boxes of the VAT return. For example, on Sage you should use T21 for a reverse chargeable standard rated sale or purchases and T26 for a reverse chargeable reduced rate sale or purchases. We would recommend you change your invoice template to include the statements required by HMRC as detailed above.
If you have any questions or would like to discuss further, please contact Helen Garrett by email on email@example.com or by leaving a message for a call back on the usual office number.