The new VAT domestic reverse charge (CIS) regulation will be applied in the construction field as of March 2021
NOTE: In legal terms, the mechanism for the reverse charge will not be the same with the one applying for services within the EU. It will be a brand-new mechanism exclusively for the UK which will be similar to the one used in the EU in terms of implementation.
The VAT domestic reverse charge in construction (CIS) will apply from 1st March 2021 for those offering construction services. This was initially supposed to start in October 2019 but has been delayed twice due to Brexit and Covid-19.
Two important points:
Once the CIS reverse charge applies, the customer will be responsible for paying the VAT to HMRC rather than the seller.
The measure applies only for construction services provided between two businesses.
To make it clearer whether and when reverse charge will apply, we have designed a simplified decision making diagram.
NOTE: The relevant regulation applies only if the construction services provider is VAT registered. Otherwise, just ignore this article. You are required to be VAT registered if your business has revenue of over a certain amount. Please click here for the relevant article regarding VAT.
In question 5, if the customer is the end user of the services, they are required to submit a declaration with the text below:
We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice with VAT charged at the appropriate rate. We will not account for the reverse charge.
Below you can find a sample of an invoice in case CIS reverse charge applies.
Roof LTD builds roof and is VAT registered and offers its services to Construction LTD which is also VAT registered and builds houses for the end user.
The system currently:
Roof LTD charges Construction LTD £10,000 + 20% VAT (£2,000). After the periodical VAT return, Roof LTD pays £2,000 to HMRC.
If Construction LTD sells the house to the end user for £100,000 + 20% VAT (£20,000), Construction LTD will pay £20,000 to HMRC.
The system after March 2021:
Roof LTD charges Construction LTD £10,000 WITHOUT 20% VAT (£2,000) and its periodical VAT return shows income VAT and outcome VAT and leaves Construction LTD responsible to declare and pay VAT when submitting its own periodical VAT return.
If Construction LTD sells the house to the end user for £100,000 + 20% VAT (£20,000), it will have to pay £20,000 VAT to HMRC.
IMPORTANT: If Construction LTD does not provide services to the end user but to an intermediate-acting business, such as itself, then it follows the same route as Roof LTD.
The aim of the new regulation is to eliminate errors (intentional or not) as much as possible as well as optimal monitoring of VAT payable to HMRC through tracking systems which would always lead only one responsible for collecting and paying VAT.
Translated / Edited by, Apostolia Nestoratou.
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This article intends to give only a general informative picture and should not, in any case, be taken as a rule. It is strongly recommended to seek a full and professional guidance specifically for your circumstances before making any decisions.