From 1 March 2021, the Construction Industry Scheme (CIS) VAT reverse charge will apply to construction services. So VAT registered businesses in the construction industry must ensure their systems and process are ready for that.
The charge applies to standard and reduced-rate VAT services:
- for individuals or businesses who are registered for VAT in the UK
- reported within the Construction Industry Scheme
What is the meaning of VAT reverse charge?
Well, normally a supplier charges VAT on all their VATable supplies to the customers. Let’s say your VAT supplies are £100 and you charge 20% VAT. Then your invoice should be £100+£20 = £120. You collected £20 VAT on behalf of HMRC.
You as a supplier is charging VAT. What if I say reverse this VAT charging process. That means, you will not charge VAT but your VAT registered customers will charge the VAT themselves. This is what it is all about.
How will the VAT reverse charge apply in Construction Industry?
So, if your are a VAT registered builder in the construction industry, you’ll only charge the £100 in above case from 1 March 2021. But there are certain key conditions for this new process to apply.
These conditions are as follows:
1- Both the customers and suppliers are UK VAT as well CIS registered.
So the reverse charging will not apply if your customer is not VAT registered for VAT and or CIS.
2) The supplies must be VATable, not the exempt.
3) The supplies must be constructions services and materials.
4) The supplies are not made to end customers.
That means the customer intends to make an onward supply of constructions services.
5) The customers and suppliers are not connected. For example supplies between the group of companies are connected party supplies.
What you’ll need to do?
- Check if your customer has a valid VAT number.
- Check your customer’s CIS registration.
- Review your contracts to decide if the reverse charge will apply, and tell your customers.
- Ask your customer to confirm whether they are an end user or intermediary supplier.
- Find out how to record the reverse charge in your accounts.
HMRC has kindly issued two flowcharts as follows:
If you sell building and construction services
Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used 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
Suppliers flowchart (PDF, 149KB, 1 page)
If you buy building and construction services
Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:
- payment for the supply is reported within the Construction Industry Scheme (CIS)
- the supply is standard or reduced rated
- are not hiring either staff or workers, or both
- you’re not using the end user or intermediary exclusions
Buyers flowchart (PDF, 139KB, 2 pages)
If you need any help in setting you systems and to apply the correct VAT reverse charge in the constructions supplies, please contact us here
