The VAT domestic reverse charge affecting the construction industry

7 August 2019

On 1 October, the VAT domestic reverse charge comes into effect for the building and construction industry as part of a government clamp-down on VAT fraud.

The reverse charge does not change the VAT liability: it changes the way that VAT is accounted for. In future the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. This is called a ‘reverse charge’.

It is a business to business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this as the ‘end user’.

The reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due - rather than the sub-contractor supplying the services.

The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.

The scheme is expected to operate as follows.

A VAT-registered business, receiving a supply of specified services from another VAT-registered business, for onward sale, on or after 1 October 2019:

  • should account for the output VAT on supplies received through its VAT return
  • does not pay the output VAT to its supplier on supplies received from them
  • can reclaim the VAT on supplies received as input tax, subject to normal VAT rules

The supplier should issue a VAT invoice indicating the supplies are subject to the reverse charge.

An end user should notify its end user status, so the supplier can charge VAT in the usual way.

The rules are complex so it’s important to plan ahead now to get your business ready for the changes. Contact Ann Bibby on 01295 250401 or abibby@ellacotts.co.uk for help and advice. 

Ellacotts are running a breakfast seminar in our Banbury office on Tuesday 10 September at 7.45am exploring the changes and what you can do now to prepare. To book your place, please contact Alex Taylor on 01295 250401 or alextaylor@ellacotts.co.uk.