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On 1 March 2021, the VAT domestic reverse charge for building and construction services comes into effect, changing who pays VAT to HMRC.

The domestic reverse charge means that a contractor receiving a supply of specified construction services must account for the output VAT due, rather than the sub-contractor who supplied the services. The contractor also deducts the VAT due on the supply as input VAT, subject to normal VAT rules, meaning no net tax is usually payable to HMRC. The reverse charge thus removes the scope to evade any VAT owing to HMRC by the sub-contractor.

You need to act now to make sure you are compliant and not caught out as part of this legislation will impact your cashflow.

Example of the VAT domestic reverse charge

As with all VAT, there are many complexities, but the scenario below broadly outlines the change that is taking place.

Mr Bloggs (the End User) asks Company ‘Main Contractors Limited’ to undertake work on his house. ‘Main Contractors Limited’ have the contract with Mr Bloggs and start the work. Along the way Main Contractors Limited will subcontract some of the work out, to say a local electrician.

Before 1 March 2021, if the electrician was CIS and VAT registered they would invoice Main Contractor Limited for the work done, plus VAT and Main Contractor Limited would pay this gross amount, less any CIS tax due and retention monies.

If this was an invoice for £1,000 + VAT (so £1,200 in total, assuming standard rate VAT applies), then Main Contractor Limited would receive an invoice to pay of £1,200 less CIS tax and retention monies.

Post 1 March 2021, as the local electrician is not engaged directly by the ‘End User’, they will now raise a sales invoice to Main Contractor Limited for their fees, and the new ‘Domestic Reverse Charge VAT’ will apply to the invoice. Main Contractor Limited would receive an invoice to pay of £1,000 less CIS tax and retention monies.

The electrician will not receive the £200 for VAT as they would have under the existing rules.

Things to consider

Who is the end user?

In the future expect to be asked to notify your status in respect of particular construction contracts’. If in any doubt, ask the customer or the main contractor or contact us to talk through with us.

You need to know if you are dealing with the end user so you can get your invoicing right.

If no confirmation is given in writing, then a reverse charge invoice should be issued. The written confirmation should be kept for your files should HMRC ever require evidence.

Invoicing

If you are not invoicing the end user you must state clearly on your invoices that the transaction is subject to Domestic Reverse Charge VAT and you also have to say how much VAT you would have charged if the Domestic Reverse Charge VAT mechanism had not been applied. HMRC have provided examples of wording that can be used on your invoices.

VAT returns

When the local electrician is completing their VAT return, the £1,000 will be entered into Box 6 of their VAT return. There will be no entry in Box 1.

For Main Contractor Limited, they will include the £200 of VAT in their Box 1 and Box 4 (no impact on the overall VAT payable for that VAT return). The £1,000 will then be entered into Box 7 (note NO figure in Box 6 of the VAT return).

These changes are complex so if in doubt, please contact us. HMRC has put together some useful diagrams explaining the actions that need to be taken.