The new reverse charge VAT regime for contractors and subcontractors in the construction industry comes into effect in April 2021. HMRC has published guidance and has also produced a VAT Reverse Charge Technical Guide. Here’s what you need to know:
The reverse charge only applies if both parties are registered under the Construction Industry Scheme (CIS), both parties are VAT registered, and VAT is chargeable on the supply.
Where the new VAT regime applies:
- If you are making payments for construction works, you don’t pay VAT to the subcontractor – you pay it to HMRC.
- If you are a subcontractor receiving payments, you will only receive the net of VAT amount, which will affect cash flow. You should consider changing to monthly VAT returns to get VAT repayments more quickly.
The reverse charge applies to both labour and materials (compared to the CIS that only applies to the labour element of invoices).
The new rules don’t apply if you are an ‘end user’ – i.e. you are not making any onward supply of the property or the construction services e.g. if you are paying for a building to be constructed to occupy. Companies connected to end users are also treated like end users. End users have to notify the supplier or building contractor either in the contract or separately.
If the reverse charge applies, the invoice has to say so. No VAT is charged on the invoice, but the invoice must refer to the reverse charge and show how much VAT is due under it. Wording such as “Reverse charge: VAT Act 1994 Section 55A applies” or “Reverse charge: Customer to pay the VAT to HMRC” should be included.
The new regime doesn’t just apply to contracts entered into after April 2021 – it also applies to existing contracts that have already been entered into. So the VAT treatment will change part way through an existing contract.
Most standard industry contracts do not take the new VAT regime into account, so we expect to see amendments issued to deal with the new arrangements.