Get ready for the VAT domestic reverse charge

Get ready for the VAT domestic reverse charge

The VAT reverse charge represents a significant change to the way in which VAT is reported, recorded and paid in the construction sector.

The change to the rules from 1 March 2021 affects businesses signed up to the CIS that act as either a contractor or a sub-contractor.

However, the scheme does not apply to:

  • Services supplied to non-VAT registered individuals or businesses (work done for homeowners or domestic users)
  • End users and connected intermediaries i.e. property landlords, owner/occupiers
  • Overseas work
  • Businesses using the Flat Rate Scheme (reverse charge supplies will have to be accounted for in the VAT due to HM Revenue & Customs)
  • temporary workers your business supplies and is responsible for paying.

In these examples, work should be invoiced and accounted for in the usual manner.

HM Revenue & Customs (HMRC) has defined a list of construction services as within the new reverse charge regime, which can be found here.

Where a mixed supply is made containing a reverse charge and normal element then you should apply the reverse charge to the entire supply, subject to a de minimis of 5%.

You will need to make changes to your contracting, invoicing and accounting procedures to take the reverse charge into account, but this will differ depending on whether you are a contractor, sub-contractor or operate as both.

You should also discuss the cash flow implications on your business of moving to the new regime, as there may be ways to mitigate the impact.

The reverse charge will apply to all jobs completed on or after 1 March 2021, but it may also apply to work that was commenced before this date but completed afterwards.

Determining when the switch to the new VAT regime takes place depends on the tax point i.e. the date of issue of the VAT invoice or the receipt of payment.

Where the tax point is on or after 1 March 2021 then the reverse charge should be applied even for work commenced before this date. Otherwise, the existing VAT rules apply.

The VAT reverse charge is complex and likely to have a significant impact on the construction industry, so we are standing by to lend our assistance to businesses in the sector. To find out how we can help, please contact us. 

Get ready for the VAT domestic reverse charge
Get ready for the VAT domestic reverse charge

Get ready for the VAT domestic reverse charge