Domestic Reverse Charge for VAT Explained

UPDATE:  Friday 6th September 2019

The Government has today announced that this legislation will be delayed until October 2020.

The domestic reverse charge is a big change to the way that VAT is accounted for within the construction industry and is effective as of 1st October 2019.  The reverse charge has been introduced for businesses that fall under the scope of CIS and are VAT registered, the reverse charge does not apply to consumers.  The reason for the reverse charge is to eliminate VAT fraud within the construction industry.  This charge aims to prevent companies from setting up and then closing before VAT is paid to HMRC.

The reverse charge will affect you if you supply or receive specified services that fall under the Construction Industry Scheme (CIS).

 

If your business is not VAT registered and/ or you do not fall under the scope of CIS the reverse charge does not apply to you.  The reverse charge only applies when VAT is charged at the standard rate.

 

So what does reverse charge mean? 

Lets start with individuals or businesses that do fall under the scope of CIS and are VAT registered but the reverse charge will not apply.

End User and /intermediary Supplier Criteria:

If you are classed as an end user or an intermediary supplier the reverse charge does not apply to you.

To meet the criteria of end user you must be the final customer of building and construction services.  An end user is a business or group of businesses, that do not make onward supplies of the building and construction services in question.  For example a building contractor using services from a range of sub-contractors to build a housing estate that upon completion will be sold on as finished products.

To meet the criteria of intermediary supplier you must be connected or linked to the end user by either sharing relevant interest in the land where the construction is taking place or be a part of the same company as defined under section 1161 of the Companies House Act 2006.

If you meet the criteria for either intermediary supplier or end user you will need to notify your customers and relevant suppliers to let them know your position and that standard VAT accounting rules will continue to apply.

Please be aware that whilst you may meet either of the criteria above for one project, it may not be the case for every project and therefor you should monitor your position for each new project you undertake and with each current customer and supplier relationship you have.  

 

If you are a supplying services that fall within the scope of CIS:

If the services you supply fall within the scope of CIS and the business/ individual you are supplying them to are CIS registered and you are both VAT registered then the reverse charge applies, providing your customer does not meet the end user criteria.

This means that as of 1st October 2019 you need to stop applying VAT to invoices that you issue to your customer.  Your customer will be responsible for accounting for the VAT.

It is advisable to contact your customer to let them know that as of 1st October 2019 you will no longer be applying VAT to invoices and the accounting responsibility for VAT will lie with them.  Your customer may respond by informing you that they are an end user and therefore standard VAT rules apply.  In which case it is recommended you keep a record of this and continue as normal.

If you meet the criteria for intermediary supplier you will need to notify your customers of your position and confirm that you will continue to charge VAT as normal.

 

If you are receiving specified services that fall within the scope of CIS, and you are CIS registered yourself:

If you are receiving services under the scope of CIS then the service providers will stop charging you VAT on their invoices as of 1st October 2019 and you will be responsible for accounting for the VAT.

You should expect to receive correspondence from the service provider to confirm they will no longer charge you VAT, it may even be worth you contacting them to clarify your position.

If you are the end user of the services then you need to issue a letter to the service provider to inform them of this and standard VAT rules will continue to apply.

 

You may find that both of the above apply, in which case you will have VAT liability on behalf of suppliers but none on behalf of customers.

 You may also find that some customers / suppliers fall within the scope of the scheme and some don’t and therefor have to vary the way you account for VAT according to who you are accounting for. 

 

What should you do to prepare for the Reverse Charge?

You need to consider how the scheme will effect you.  If you are the end user or intermediary supplier then you will need to issue letters to anyone who you have a business relationship with that will be effected by the reverse charge to state your position.

You will need to consider each business relationship you have to see if the same applies to each relationship.  For example a scaffolding firm providing scaffolding to a large building development may find that the building contractor on this project has end user status and therefore standard VAT rules apply and VAT is charged on services.   The same scaffolding firm providing scaffolding for a roofing contractor whose work will be falling under the scope of CIS will fall into the reverse charge scheme and therefore will not charge VAT on services provided.