VAT reverse charge for CIS

The rather innocuous sounding “domestic reverse VAT charge for building and construction services” comes into force tomorrow (1st March 2021). If you are a VAT registered member of the CIS scheme, you may need to take action.

Below are some basic guides for both contractors and subcontractors, but as with anything else, if you have any questions, please feel free to get in touch!

 

If you are a CIS registered contractor (IE you employ subcontractors):

If your subcontractor is VAT registered, and you are not an end user (IE it is not for work on your own property), then your subcontractors will need to apply the VAT reverse charge. This means that in effect you will pay the VAT element through your VAT return.

In actuality, this gives you a cash flow benefit, as per the below example:

Eg. VAT registered subcontractor bills you for £1,000 (excluding VAT) for labour during March, and let’s assume your VAT quarter runs March-May.

  • Under the old scheme, you’d pay the subcontractor £1,200 during March, and then reclaim the £200 of VAT on your VAT return at the end of May.
  • Under the reverse charge scheme, you’ll pay the subcontractor £1,000 during March, and then both pay the £200, and consecutively reclaim the same £200 on your VAT return at the end of May.

Effectively, this means that you don’t get the £200 back, but you haven’t ever paid it, although it is still declared to HMRC.  So you’ve had the benefit of the £200 staying in your account from March to May.

The below flowchart will help you assess whether or not the reverse charge applies to supplies you are receiving as a CIS registered contractor.

 

If you are a CIS registered subcontractor (IE you supply labour to a CIS registered contractor):

The reverse charge applies principally to the supply of labour. If you buy a large number of materials for the contractor, it is important to note that unlike the CIS deductions which exclude materials, the VAT reverse charge applies to the entirety of an invoice, unless that invoice is for materials only.

In practical terms, this means that if you invoice a contractor £1,000 (excluding VAT), rather than being paid £1,200 and then having to pay HMRC £200 at the end of your VAT quarter, you will state on the invoice something like “This invoice is subject to the domestic reverse VAT charge for building and construction services. Customer to pay the VAT to HMRC.” (There are various approved references that can be used – we would be happy to advise if you would like to use something different to this).

Because of this, many subcontractors may find that their VAT returns usually result in a repayment from HMRC. We do not know at this point whether this is likely to result in more VAT checks from HMRC, but it seems clear that HMRC will not require contractors to attribute the VAT they account for through the reverse charge to individual subcontractors in any way. It may be that they plan to tie this up (at least to some level) through the contractors monthly CIS returns, but this remains to be seen as the new reverse charge process beds in.

The below flowchart will help you assess whether or not the reverse charge applies to supplies you are invoicing as a CIS registered sub contractor.

  1. Craig Rose on September 2, 2021 at 3:46 pm

    I am a builder and I fix a roof for a member of the public, whom I understand to be the “end user”. A supplier provides me with roof struts only. Both myself and the supplier are VAT registered and CIS registered. Does this supply form part of the reverse charge scheme. If not then why does the HMR&C stipulate that certain types of supply are outside the scope of reverse charge?

    • bairdconsulting on September 8, 2021 at 2:59 pm

      Hi Craig, our understanding is that as this is the supply of materials only, and therefore outside of the scope of CIS, it would also fall outside of the scope of the DRC. Any queries, please do get in touch with us directly. James

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