Domestic Reverse Charge VAT

So what is Domestic Reverse Charge VAT?

It is a new scheme set up by HMRC to help combat fraud, initially planned to start in October 2019, but like most plans over the last year, the date was postponed until 1st March 2021. Here we are in March already! It affects construction workers working within the scope of CIS and that are VAT registered. If you are only one or none of these then no need to try and get your head around another new scheme, but if you are both.. grab a cuppa and read on!

Ready to learn the new rules?

Domestic Reverse Charge VAT is a new scheme that has been set up by HMRC, which changes the way VAT is managed to combat fraud in the construction industry. Subcontractors will no longer be responsible for paying over the output VAT from their sales to HMRC but it will become the contractors job to do so. This will take effect from 1st March 2021.

Who does this apply to?

This applies to you if you are a subcontractor carrying out work for contractors who are:

• Vat registered
• Within the scope of CIS
• The work being carried out is standard or reduced rated (20% or 5%)
• Not an end user (doesn’t own/will be selling the building where the work was completed)

It doesn’t apply to you if:

• You, the subcontractor, or the contractor you are working for are not VAT registered
• The work being carried out is zero-rated (for example, new builds)
• The contractor is the end user

What do you need to do?

First, as a subcontractor you will need to find out if the contractor you are about to start work for is the end user and get this in writing. You will also need proof that the contactor is VAT registered and subject to CIS

When issuing an invoice, the VAT charged will still need to be shown but not included in the amount payable. Here is a basic example of how it will work:

Steve is a subcontractor that works within the scope of CIS,is VAT registered and isn’t carrying out work that is 0%, he is working for Carl, the contractor, who is also within the scope of CIS, VAT registered and isn’t an end user. When Steve sends his invoice to Carl he will detail the labour cost of £170, but instead of adding VAT in the usual way, he will note on the invoice, “Reverse charge: Customer to pay VAT to HMRC” along with the VAT rate (20%) and the calculated VAT £34.

This will let Carl know how much VAT is charged and the amount to be included on his VAT return and to pay over to HMRC on Steve’s behalf and not to be paid straight to Steve. When Carl pays Steve for this invoice, he will deduct CIS on the £170 – £34 leaving a total of £136 and that’s it!

This may have an adverse effect on your cashflow as a contractor as you won’t be receiving the output tax to claim back as it will be in affect cancelled out by the subcontractors VAT that will be added to your return – you may consider changing to monthly VAT returns, have a chat with your accountant to talk through you options.. or better still, come and have a chat with us

Lots of love from the Dream Team at Diverso ♥