From 1st March 2021, if you supply goods and services to the construction sector, then you will need to implement VAT reverse charging on your invoices

Find out everything you need to know about the domestic reverse charge for supplies of building and construction services.

What is VAT reverse charge?

Reverse charge is the amount of VAT you would have paid on a service if bought in the UK. You have to add that amount to the total of VAT you are going to pay to HMRC that quarter, but also to the amount of VAT you are going to reclaim in that quarter.

Domestic VAT reverse charge legislation (DRC) is a change in the way Construction Industry Scheme (CIS) registered construction businesses handle and pay VAT. It is being introduced in the UK on 1 March 2021, having previously been delayed from October 2019.

Who will it affect?

It affects VAT registered construction businesses who supply or receive construction and building services that are reported under the CIS. It means the customer (contractor) will be responsible for the VAT due to HMRC instead of the supplier (subcontractor). That means that it is likely to affect your business in some shape or form.

Preparation checklist

  • Check when you must use the reverse charge on your sales, purchases or both
  • Find out how the charge works if you supply services
  • Find out how the charge works if you buy services
  • Make sure your accounting systems and software can deal with the reverse charge
  • Consider whether the change will impact your cash flow
  • Make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work

Here’s 5 things you and the finance department of your organisation need to know

1) It’s designed to stop fraud

Some sub-contractors claim VAT and never pay it.  By moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible. Sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.

2) It must be used, but only in specific circumstances

The VAT reverse charge must be used for most supplies of building and construction services from the 1st of March 2021. Specifically, this means it must be applied if the tax point is on or after 1st of march 2021. It applies only to VAT-registered businesses who are supplying/receiving services that are reported under CIS.

Specific guidance on which services are subject to the reverse charge, can be found here. There are also flowcharts available to help you work it out.

Supplying

The reverse charge will need to be used for suppliers  when:

  • Your customer is registered for VAT in the UK
  • Payment for the supply is reported within the Construction Industry Scheme (CIS)
  • The services you supply are standard or reduced rated
  • You’re not an employment business supplying either staff or workers, or both
  • Your customer has not given written confirmation that they’re an end user or intermediary supplier

See the Supplier’s flowchart here and how to use the VAT Reverse charge if you’re a supplier here.

Buying

The reverse charge will need to be used for buyers when:

  • Payment for the supply is reported within the Construction Industry Scheme (CIS)
  • The supply is standard or reduced rated
  • You’re not hiring either staff or workers, or both
  • You’re not using the end user or intermediary exclusions

See the Buyer’s flowchart here and how to use the VAT Reverse charge if you’re a buyer here.

3) It may affect your cash flow

Sub-contractors

The changes might be bad for cashflow, because you won’t be able to use VAT received from sales to help with liquidity.

Also, because you no longer pay VAT on your sales, you might become a ‘repayment trader’ – which is a business whose VAT return means claiming money from HMRC, rather than making a payment.

HMRC suggests that such businesses apply to move to monthly returns, to speed up payments received from HMRC and therefore benefit cash flow.

Contractors

The changes might be good for cash flow, because the VAT you previously had to pay to contractors is now paid in your VAT return. But make sure the invoices you receive are correct, so your VAT return is correct!

4) It applies to materials, if they’re paid for as part of a service

The VAT reverse charge applies to services and the materials used in those services. It does not apply to materials supplies independently of a service.

5) Your invoices will need to use new terminology

Invoices should clearly indicate the reverse charge applies using the correct terminology. HMRC provides this invoice example.

How it works at Okappy

With Okappy you can set whether an invoice item is a VAT reverse charge item and set which customer VAT reverse charges will apply to. Then when you raise an invoice with the relevant line item and customer, your invoice will be calculated using the VAT reverse charge.

If so, the invoice will show

  • a label saying that VAT reverse charge applies
  • a note that “Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant VAT rate as shown above
  • will not include a VAT amount for that line in the total

For more information on how to set up a customer and line item for VAT reverse charge, see this help and support article.

Extra information

VAT reverse charges do not contribute to a company’s potential VAT threshold. So if you aren’t registered for VAT then any attempt to apply the reverse charge will not push you over the limit.

If you’re invoicing for mixed supplies, some of which require a VAT reverse charge, you should apply the VAT reverse charge for the whole invoice.

For more information, have a read of the  VAT reverse charge technical guide on the government website.