VAT domestic reverse charge: Everything you need to know

If you’re working in the UK’s construction industry, it’s important that you get all the facts when it comes to the recent introduction of the VAT domestic reverse charge.

The nature of how you handle and pay your VAT is set to change now that the UK government has ushered in a new VAT reverse charge system. Today, the team here at One Two One Accounts are keen to briefly break down this new system and ensure you have all the facts so that you and your business can remain compliant. So, without further ado, here’s everything you need to know.

What is the VAT Domestic Reverse Charge?

The VAT Domestic Reverse Charge officially came into force on March 1st, 2021.

Essentially, the VAT Domestic Reverse Charge for Building and Construction Services (its full title) acts as a key change in how VAT is handled and paid for certain types of construction services operating within the UK. This includes the materials that are directly used within such services.

This new system effectively acts as an extension of the Construction Industry Scheme (CIS). Most importantly, the VAT Reverse Charge applies only to transactions that are reported under the CIS and take place between VAT-registered contractors and sub-contractors.

Under the scheme, businesses supplying construction services to a VAT-registered customer no longer need to account for the VAT. Instead, it is the customer who accounts for the VAT.

Who does it apply to?

The reverse charge only applies to VAT-registered businesses that are supplying or receiving services that are reported under the aforementioned CIS.

As such, it applies to the majority of services that are supplied between UK construction subcontractors and contractors.

Put simply, it works in the following manner: If your CIS business receives an invoice for construction services with the reverse charge applied, then it is you who accounts for the VAT within your overall input tax. Essentially, it is as if you have charged it to yourself, rather than having been charged for VAT by the construction company.

If your business is not VAT registered then the reverse charge cannot be applied to you. In this instance, standard VAT rules apply to the supplier, meaning they will charge you VAT and account for it in the usual manner.

We advise that if you are not VAT registered, then you should make it clear to the supplier in writing.

Does the Reverse Charge not apply to subcontractors?

According to HMRC, the VAT Reverse Charge does not apply to subcontractors, unless all of the following apply:

• Any of the supplies you are producing/supplying fall under the CIS.
• The supply is standard or reduced-rated.
• Your customer is VAT registered.
• Your payment will be reported under CIS.
• The customer is not an end user.

What if the Reverse Charge does not apply to you?

If the reverse charge does not apply to the services you provide, normal VAT rules will apply. This means you should invoice for the VAT and account for it in your own VAT return.

If you are unsure as to whether or not the charge will apply to your business, a knowledgeable, professional accountant can help to create a clear picture of your obligations. Here at One Two One Accounts, we specialise in providing detailed, circumstance-specific advice to a range of SME business owners.

What is the purpose of the VAT Domestic Reverse Charge?

According to HMRC, the reverse charge is being introduced in an attempt to try and combat fraud within the construction industry,

A commonplace type of fraud is often carried out whereby construction businesses charge VAT for their services, but then disappear before the VAT bill is paid, thus retaining an additional 5% to 20% profit that does not by rights belong to them.

By shifting the VAT charge further down the supply chain, HMRC seeks to render this sort of fraud technically impossible.

Are you in need of detailed financial advice for your business? One Two One Accounts can help. Get in touch today to get the ball rolling.