From 1st March 2021, the Domestic Reverse Charge must be used for most supplies of building and construction services.
The new rules apply to:-
- Services reported under the Construction Industry Scheme
- Individuals and businesses that are VAT registered in the UK and where VAT is chargeable at 20% or 5%
The reverse charge does not apply to End Users. An End User is a final customer or a consumer. They are not making onward supplies of the building and construction services supplied to them. An End User has an interest in the land on which the works are taking place.
For example, if you are providing works directly to a homeowner, the Reverse Charge will not apply in this scenario, you would still invoice for the work in the usual way.
If the customer is not the End User, there are several questions you will need to ask yourself for each job to see if the VAT Reverse Charge applies:-
- Is the work reportable under the construction industry scheme?
- Are both parties VAT registered? (eg you and your customer or you and your supplier?)
- Is the supply subject to VAT at 20% or 5%?
If the answer is Yes to all of the above questions and the supply is not to an End User, then the Reverse Charge Rules will apply.
If any one of the above answers are No, then the VAT Reverse Charge rules will not apply because the sale does not meet all of the conditions.
If these rules apply to you
If the new rules do apply, you should issue a sales invoice showing all of the usual information, however, the invoice must also:-
- contain a note to say the Domestic Reverse Charge applies and the customer is required to account for the VAT on the invoice.
- clearly state how much VAT is due under the Reverse Charge, or the rate of VAT that is applicable to the invoice if the VAT amount cannot be shown.
- Not include VAT in the total amount charged to the customer.
HMRC have provided a Reverse Charge invoice example in section 14 their technical guidance https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#invoices
What you must put on your return
Where the Reverse Charge applies, you will issue an invoice for the net amount to the customer and you will receive payment for the net amount only. You will record the net amount of the sale in Box 6 of your VAT return, you will not show the VAT amount in Box 1 of the return.
The customer will record the VAT on your sale in Box 1 of their VAT return (sales VAT) and in Box 4 of their VAT return (purchase VAT). They will only show the net amount in Box 7 of their VAT return (net purchases).
If the supply is partly labour and partly materials, the whole invoice will be subject to the new rules.
Supply and fix works will be subject to the new rules, for example where a joiner has constructed a staircase offsite and then installs the staircase onsite.
The new rules will apply even if you or your subcontractor have gross status for CIS, because a gross payment is still reportable under the CIS scheme.
The reverse charge does not apply to sales that are zero rated for VAT since there is no VAT liability to apply the reverse charge to.
The reverse charge will also not apply to work for non-VAT registered businesses, again there is no VAT to apply a reverse charge to in this scenario.
For credit notes relating to income invoiced under the old rules, VAT should be included in the old way. The VAT reverse charge rules will not apply to the credit note, if they did not apply to the original invoice.
For further guidance please visit https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
March 24th, 2021