VAT reverse charge: Are you prepared?

October 6, 2020 |
The VAT reverse charge for building and construction services will take effect as of 1 March 2021.

The introduction of this domestic reverse charge has already been delayed twice but, despite calls that the construction industry is consumed in repairing the damage of Coronavirus and protecting workers, the change looks to be going ahead early next year.

If you are a VAT-registered business operating in the construction industry and are registered for the Construction Industry Scheme (CIS) then the time to delay is running out. You should use the next 5 months to take action and to prepare for the changes, which will impact both VAT compliance and cashflow management.

What does the CIS VAT reverse charge apply to?

This new domestic VAT reverse charge is being introduced as an anti-fraud measure in the UK. It will fundamentally overhaul the way that VAT is handled and paid: customers within the construction industry who receive construction services must pay the VAT direct to HMRC, rather than to the supplier, if they report under the CIS. By way of example, a contractor who employs a sub-contractor to supply construction services will be required to deal with the VAT and pay it directly to HMRC. The onus is no longer on the sub-contractor, but on the contractor.

The charge will apply to standard and reduced-rate VAT services:

  • for individuals or businesses who are registered for VAT in the UK; and
  • reported within the Construction Industry Scheme.

The charge does not apply to supplies:

  • of VAT exempt building and construction services.
  • that are not covered by the CIS, unless linked to such a supply (more information on exempt services at uk).
  • of staff or workers.
  • to a non-VAT registered customer, ‘end-user’ or ‘intermediary suppliers’ who are connected. If you fall into one of these categories, you must contact the supplier in writing to make the exemption clear.

How can you prepare for the changes?

You will need to ask yourself the following questions and seek advice from your financial advisor:

  • Can your accounting system deal with the reverse charge?
  • Are the necessary staff in your finance team aware of the changes and how they will work? E.g. are they able to identify relevant CIS contracts and end-users?
  • How will the change impact your cashflow?

How can we help?

If you have questions as to how you will be affected by the upcoming changes, please speak to your usual relationship principal or contact our Proptech team.