After several delays, the Construction Industry Scheme (CIS) VAT reverse charges will be applied from March 1.
The measure was due to start in October 2019, but Brexit and Covid-19 caused delays. So, how will it change the construction industry?
The main aim of the game is to combat missing trader fraud in the construction sector.
Under the rules, a VAT-registered business supplying certain construction services to another VAT-registered business for onward sale needs to issue a VAT invoice. These invoices should state the service is subject to the domestic reverse charge.
However, it is the recipient that must account for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules.
Unlike other reverse charges, the value of such reverse charge services will not count towards the VAT registration threshold. This should be good news for smaller businesses.
Who does it apply to?
This question isn’t straightforward to answer. However, there are guidelines as to who is and isn’t affected by the changes.
It is estimated that about 150,000 businesses are affected by the domestic reverse charge and that more than a third are not aware of the new rules. You can see if your trade is impacted by visiting HMRC’s website.
Among those included is construction, alteration, repair, extension, painting and decorating. It also includes demolition of buildings, civil engineering and the installation of heating, lighting and air-conditioning.
The domestic reverse charge will apply to specified services unless:
- Services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building.
- The recipient makes onward supplies of those construction services to a connected company.
- The recipient is not VAT registered, or required to be VAT registered.
- Recipient is not registered under the CIS scheme.
- The supplier and recipient are landlord and tenant or vice versa, or the supplies are zero-rated.
What do I do next?
If your business is affected and the new guidelines apply to you, you will need to change the way you send out invoices.
Invoices must make clear that the domestic reverse charge (DRC) applies and that the customer is required to account for the VAT. There is no specific wording required but HMRC provides examples.
Changes could include a review of supplies. You may need to ask suppliers to buy goods and materials where their services to you fall under the DRC. This will alleviate the need to fund VAT payments on the goods and materials.
If you are unsure what it means to you, you can contact us for details.