VAT reverse charge process for construction services

…Part 1 – background to the new charge and how it will work

HMRC Delay

HMRC have announced that the reverse charge process will not now be implemented until 1st March 2021.

Update: 17/08/2020

As part of the government’s clamp-down on VAT fraud, they are introducing the VAT domestic reverse charge for building and construction services with effect from 1 October 2019.

In this article we cover the background in relation to the new charge and how it will work, in part 2 we will cover the definition of specified services and end-users, together with some action points for you to consider.

Building a houseA domestic reverse charge means that a contractor receiving a supply of specified construction services must account for the output VAT due, rather than the sub-contractor who supplied the services. The contractor also deducts the VAT due on the supply as input VAT, subject to normal VAT rules, meaning no net tax is usually payable to HMRC. The reverse charge thus removes the scope to evade any VAT owing to HMRC by the sub-contractor.

The charge affects only supplies at standard or reduced rates where payments are required to be reported via the Construction Industry Scheme (CIS). It does not apply:

  • to zero-rated supplies (typically new build residential works)
  • to services supplied to ‘end users’ or ‘intermediary suppliers’.

How will the scheme work?

A VAT-registered business, supplying ‘specified services’ to a VAT-registered business, other than an end user or intermediary supplier:

  • issues a VAT invoice indicating the supplies are subject to the reverse charge and that the customer must account for the VAT. The invoice does not therefore charge any amount for VAT. It should, however, state how much VAT is due, or the rate of VAT, if the VAT amount cannot be shown.

The business receiving the supply of specified services:

  • does not pay output VAT to its supplier on supplies received from them
  • accounts for the output VAT on supplies received through its VAT return
  • reclaims the VAT on supplies received as input tax, subject to normal VAT rules.

Example – Shape your Houses Ltd

Shape your Houses Ltd is a VAT-registered contractor. It uses Brickyard Bill, who is also VAT-registered. Brickyard Bill issues an invoice which shows the usual information required to be shown on a VAT invoice but instead of charging VAT, the invoice states that the VAT reverse charge applies.

Shape your Houses does not pay VAT to Brickyard Bill. It accounts for the VAT on its own VAT return, entering it as both output and input tax. It enters the value of the purchase from Brickyard Bill as part of its inputs. It does not include the value in its outputs.

Their VAT returns will look like this:

  • Brickyard Bill puts the net value of the sales in box 6 of the VAT return: but no output tax in box 1
  • Shape your Houses uses box 1 to declare the output tax on the services from Brickyard Bill to which the charge applies. It doesn’t include the value of the transaction as an output in box 6. It reclaims the input tax on reverse charge purchases in box 4 and includes the net value of purchases in box 7.

In our next article, we will cover the definition of supplied services and end-users in more detail, together with some action points for you to consider.

Book an Appointment with Essex AbelShould you wish to discuss the effect of the above in more detail or discuss your tax affairs in more details, please contact us for a FREE initial consultation.

This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted by the author or Essex Abel Ltd.