VAT Reverse Charge Rules

NEW VAT RULES FOR BUILDING & CONSTRUCTION SERVICES – REVERSE CHARGE

 

IMPORTANT CHANGES FROM 1ST OCTOBER, 2019

You may or may not be aware but from 1 October 2019, HMRC are changing the way in which businesses operating within the construction sector account for VAT in respect of services provided under the Construction Industry Scheme.  They are the new VAT Reverse Charge Rules.

These changes only affect work you undertake for other contractors who are not the final end user, so any work you do for domestic customers (or non VAT-registered contractors) will not be affected by these changes and you will charge VAT in the normal way.

Nothing will change up to 30th September, 2019, but from 1st October, 2019, the new rules come into effect for any business that is:

  1. Registered under the Construction Industry Scheme (CIS)
  2. VAT registered

The rules apply to both Sales invoices (those sent to your clients) and Purchase Invoices (those received from your supply chain).

Sales Invoices

From 1 October 2019, if you raise a sales invoice to another VAT and CIS registered business and the supply is standard or reduced rated, then you will not add VAT to your invoice and you will need to state on the invoice that ‘VAT is not being charged under the Reverse Charge rules’ and also clearly state the amount of VAT due under the domestic reverse charge.

The only exception will be if the business to whom you are raising the invoice has confirmed to you that they are the final user of the service, building or structure. In which case, VAT should be charged in the normal manner.

Example:

You are employed as a subcontractor to carry out some works by a main contractor valued at £1,000.00 + VAT.

You will invoice for £1,000 but not add the £200 VAT to the amount due:

Nett Amount: £1,000.00

VAT Amount: £0.00

Total Due:   £1,000.00

You will state on the invoice ‘VAT is not being charged under the Reverse Charge rules’

You will also state the amount of VAT due under the domestic reverse charge is £200.00

You will then be paid £1,000.00

The main contractor’s VAT return will show £1,000 plus £200 VAT as both an input and an output VAT (which, in effect, cancel each other out)

Because you have not been paid £200 VAT, you will not owe HMRC £200 VAT.

 

For clarification, if you do some work for end consumers like domestic customers, or for customers who are not VAT registered or not CIS registered, you will bill them the VAT as you currently do. The new rules only affect supplies you make to firms who are not the final user of the building or structure and who are VAT registered. It is therefore sensible from now on to keep a record of your customers’ VAT numbers and ask them whether they include the payments they make to you on a CIS return (i.e. the work is within the CIS scheme and they are CIS registered).

Please be aware that if invoices are raised incorrectly then expect them to be returned to you so they are resubmitted in the right format which may cause a delay in payment being made.

 

Purchase Invoices

If you receive an invoice under Reverse Charge rules, make sure it is correct and follows the guidelines above.  If it does not then it needs to be returned and a replacement issued. You also have to make sure that the VAT is correctly accounted for on your VAT return.

 

The change is ahead – you must prepare!

If you use computerised software for your accounting you need to ensure that it has been updated and correctly configured to comply with the Reverse Charge rules.  Your sales invoices, when Reverse Charge rules apply, should not include VAT but clearly state the amount together with the statement ‘VAT is not being charged under the Reverse Charge rules

You will also need to account for the VAT correctly on any purchase invoices you receive.  Most software offers a tax code option of Reverse Charge 20% or 20% RC which should then correctly account for the input and output VAT on your VAT return.

You may also need to prepare for any cash flow implications.  If you carry out a lot of subcontractor works then you may find yourself in a position where you are paying out VAT on the materials you are purchasing but not charging your clients and having to wait until you do your VAT return to claim the VAT back.  We strongly suggest that you speak to your accountant about this as there may be alternative options such as making monthly VAT returns.

Hopefully this explains the VAT reverse charge rules.

Steve.

 

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