What is the reverse charge for the building and construction industry?
From 1 March 2021, the domestic reverse charge must be used for most building and construction services supplies. This does not include building materials. Therefore, if your business only supplies materials, it will not be affected by the reverse charge.
Why has HMRC introduced the reverse charge?
The aim is to tackle VAT fraud in the construction industry. Specifically, HMRC are looking for missing trader fraud, and they’ve made contractors in the industry responsible for accounting for the VAT on affected transactions.
How does the reverse charge work?
Essentially, the subcontractor will no longer charge VAT on their invoices (and therefore be paid for it). Instead, the contractor will account for it directly with HMRC on their own VAT return. When the return is completed, the VAT amount will show on their return as both output and input tax – creating a zero effect on the amount to pay (or reclaim) to HMRC.
The reverse charge is essentially an extension of the Construction Industry Scheme (CIS) scheme. It only affects transactions that are ‘caught’ by CIS and only where the contractor and subcontractor are VAT registered.
What’s the difference between CIS and reverse charge?
You can read a bit more on the CIS scheme by clicking here.
The main difference is that CIS doesn’t apply to materials whereas reverse charge does – but only where a service (usually labour) is involved too.
How do I account for reverse charge?
You need to use an accounting system that is compatible with both CIS and reverse charge. When you raise an invoice and select a reverse charge VAT code, it will make the necessary adjustments to your VAT return.
If you’re a contractor
You will receive invoices from subcontractors with reverse charge on them (zero VAT). You need to make sure you code the purchase invoice in your system to the reverse charge VAT code. Your system will then make the adjustment to both input and output tax so that it’s accounted for correctly.
The scheme will have a positive effect on your cashflow as you are no longer paying VAT to your subcontractors and waiting to reclaim it on your VAT return.
If you’re a subcontractor
When you send your invoice to your contractor, you will send it with reverse charge (zero VAT). You need to make sure you code the purchase invoice in your system to the reverse charge VAT code to ensure it’s accounted for correctly.
The scheme will have a negative effect on your cashflow as you won’t be receiving VAT at regular intervals from your customers, but it’s likely that you’ll still be paying VAT to your suppliers for materials. It may also mean that your VAT return becomes a reclaim from HMRC instead of a payment to them. If this is the case, you can apply to HMRC to change your return frequency to monthly, instead of quarterly.