VAT UPDATE: reverse charge guidance for CIS contractors

Construction Industry Scheme (CIS) contractors that are VAT registered should be prepared for applying domestic reverse charges to certain transactions from next month.


 

The scheme is complicated and contractors could be at risk of under declaring their VAT if they apply the reverse charges incorrectly. For some subcontractors, there could also be some cashflow benefits to switching to monthly VAT returns, so it's worth gaining an understanding of the process. To help, we've produced the following guidelines for clients and urge you to contact us at the earliest opportunity if you have any queries or need advice.

What are CIS reverse charges?

The CIS reverse charge scheme, which comes into force on 1 March 2021, applies where there is a chain of VAT registered contractors that are separated from the end customer. It is an anti-fraud measure from HMRC to prevent VAT being lost in the invoicing chain.

When does it apply?

There are several conditions here, but in general, VAT registered CIS contractors will need to apply reverse charges to their standard or reduced rated transactions when they are not supplying construction services to the 'end user'. This end user is any person who will not be selling the services on to a further customer.

Some common examples of end users include:

  • Property developers;
  • Landlords;
  • Individuals;
  • Utility companies;
  • Local authorities;
  • Business premises owners or tenants;
  • Landed estates.
  • Customers may also be considered end users if they are in a corporate group with an End User, or they have a share in the ownership of the land where the construction services are being supplied.

If there is any doubt, it is the responsibility of the contractor to check a customer's status within the supply chain. Furthermore, end users will also need to make a declaration that they are an end user. In practice, this may not always happen; for example, if the customer is an individual and not a business.

If a customer's status remains unclear, contractors should charge the VAT rather than issuing a reverse charge invoice. It is then up to the customer to reject the full VAT invoice where a reverse charge would apply. This way the contactor minimises the risk of under-declaring their Output VAT.

How do I account for the reverse charge?

If a transaction falls outside of the reverse charge scheme, you will issue a VAT invoice in the normal way (such as main contractor, who is invoicing an end user).

A reverse charge invoice will need to state that a reverse charge has been applied but will also need to indicate the amount and rate of VAT that applies. To avoid the customer mistaking the invoice for a full VAT invoice, we have included an example invoice layout. Please click the download button at the top of this article.

Reverse charges in VAT returns

  • If you are a contractor receiving a domestic reverse charge invoice, you will need to include the applicable amount of VAT in boxes 1 and 4 (thus cancelling each other out). You do not include the net amount in box 6.
  • If you are a contractor issuing a domestic reverse charge invoice, you include the invoice without VAT on your system and only the box 6 sale will be included on your VAT return (as if you were recording a 0% VAT invoice).

Reverse charges in your accounts

Some accounting systems will be providing a new VAT code to account for this domestic reverse charge. It is not the same as the reverse charge for services outside the UK. if you have any doubt as to how to record these transactions in your software, please contact us.

Credit notes

Due to the complexity of adjusting a credit note through the reverse charge system, it is recommended that when a credit note is raised subsequently for a reverse charge supply and both parties agree, it is issued without VAT. This is allowed due to a concession within VAT notice 700 and HMRC have reiterated this concession again in their more recent advice.

Key points

  • For those contractors affected by the reverse charge, there will no longer be a clear 20% relationship between box 1 and box 6 of your return (this may already be the case if you're carrying out zero-rated supplies).
  • Contractors that previously issued standard-rated invoices, but now need to issue reverse charges, could end up in a repayment position. It may therefore be beneficial to register for monthly VAT returns to improve your cashflow for VAT refunds. A VAT enquiry may be triggered when the first refund is claimed so it is important that your reclaim calculations and documentation are accurate to support your case, especially whilst you are getting used to the new system.
  • If you are a regular contractor receiving sub-contractor services where the reverse charge applies, your cash flow should improve as you'll no longer need to pay the VAT and then wait to reclaim it. Instead, you'll be including the VAT via the reverse charge (in and out on same return).
  • If you only supply construction services for new dwellings (where the 0% rate of VAT applies), or always to end users, then the reverse charge is not likely to apply to you. If you include a standard rated supply on a 0% new build contract (such as a washing machine supplied in a new home's fitted kitchen), then this will still be outside of the reverse charge as it remains a 0% contact and the standard rated items will be goods and therefore not applicable to the reverse charge.
  • If you are issuing reverse charge invoices, there is a risk that you apply the reverse charge to an invoice that should be standard rated, and thus undercharge and under-declare Output VAT. It is for this reason that if you are unsure as to whether it applies, you should produce a standard VAT invoice for the customer to reject.
  • If you are a customer receiving an invoice, there is a risk that you receive a full rated invoice in error and claim the VAT, when it should have been reverse charge (in and out). If you know you are a CIS contractor and are not an end user, then you should refuse a full VAT invoice and request a reverse charge document.

For a more detailed guidance on whether the scheme applies to you, please see here.

If you have any more queries or would like advice on the reverse charge scheme, please call your normal Richardson Swift contact on 01225 325580 or email info@richardsonswift.co.uk