Changes to VAT recording of CIS sub-contractors

*UPDATE* On 6 September 2019 H M Revenue & Customs have released a brief confirming the introduction of the Construction VAT reverse charge would be delayed until 1 October 2020. The change has been implemented as H M Revenue & Customs explain “Industry representatives have raised concerns that some businesses in the construction sector are not ready to implement the VAT domestic reverse charge for building and construction on 1 October 2019”.

From 1st October 2020 a VAT reverse charge is being introduced for sub-contractors in the construction industry. This is being introduced by H M Revenue & Customs to combat missing trader VAT fraud in the construction sector. The reverse charge will apply to supplies by a sub-contractor to a contractor of VAT registered businesses where the contractor is not the end user. The VAT reverse charge will apply to the provision of construction services, including materials.

The VAT reverse charge will not apply in the following circumstances:

  • If the supplies are zero rated.
  • If the recipient makes an onward supply to a connected party.
  • Services are supplied to the end user.
  • The supplier and recipient are landlord and tenant.

Because it only applies to supplies where payments are reported through CIS (Construction Industry Scheme) the supplies affected are closely aligned to those defined as construction operations under CIS.  The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply. In addition, if there has already been a domestic reverse charge supply on a construction site, if both parties agree, any subsequent supplies on that site between the same parties can be treated as domestic reverse charge supplies. This should reduce doubt and speed up the decision making process for both parties. If still in doubt, provided the recipient is VAT registered and the payments are subject to CIS, it is recommended that the reverse should apply.

When the VAT reverse charge applies the supplier will have to issue a VAT invoice stating that the supply is subject to the domestic reverse VAT charge. The recipient will then account for the VAT on their VAT return and pay this to H M Revenue & Customs instead of paying the VAT element of the invoice to the supplier. The recipient can the recover the input VAT as normal.

As the VAT element of the invoice is no longer paid the the sub-contractor this will have an impact on the sub-contractors cash flow. The VAT element of invoices to contractors, covered by the VAT reverse charge, will no longer be available to use as working capital as it will not be received. The contractor will benefit from this as the VAT element will only have to be paid when their normal VAT payments are due.

H M Revenue & Customs understands the difficulties businesses may have in implementing the domestic reverse charge and will apply a light touch in dealing with related errors that occur in the first 6 months after introduction, where businesses are trying to comply with the new legislation. However, businesses that knowingly claim end user status when the domestic reverse charge should have applied will still be liable for the output tax that should have been paid and may be liable for penalties. 

If your businesses is VAT registered and in the construction industry then these changes are likely to have a considerable impact on you. If you require any assistance with your VAT then please contact us today.