Date
17 Feb 2021Category
Tax, VAT & Indirect Tax, Employer SolutionsThe VAT treatment of construction services will change on 1 March 2021. Are you affected? Are you ready?
HMRC believes that around £100m of revenue is lost each year as a result of fraud within the construction sector. To combat this HMRC are introducing a domestic VAT reverse charge procedure to the construction sector. This change takes effect from 1 March 2021.
From 1 March 2021 businesses in the construction industry need to apply a domestic reverse charge on payments that are subject to the Construction Industry Scheme (CIS).
The domestic reverse charge will apply to construction services that are reported under the CIS and goods that are supplied as part of these services.
It will apply to “mixed invoices” i.e. invoices that cover both supplies that are subject to CIS reporting and supplies that do not. If payments are not subject to CIS reporting, the domestic reverse charge will not apply.
What does this mean in practice?
The change will result in some suppliers of construction services not charging VAT on their sales and their customers having to self-account for VAT on their VAT returns. Customers that have to self-account for VAT will be allowed to record an equal value as input VAT and can recover this according to normal rules. For businesses that cannot recover all of the VAT they incur, this will result in a VAT cost.
HMRC guidance states that businesses supplying construction services must not charge VAT to their customers when:
The new scheme will not apply where construction services are supplied to final consumers, however the changes will affect supplies between main contractors and sub-contractors.
Services that will be subject to Domestic Reverse Charge |
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Services that are not subject to Domestic Reverse Charge |
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The changes do NOT apply to “end users” or “intermediary suppliers” provided certain conditions are met.
An end user only receives and does not supply construction services to others. They are a business, or a group of businesses, that does not make onward supplies of the construction services and is registered for CIS as mainstream or deemed contractor because it carries out construction operations, or because the value of its purchases of building and construction services exceeds the threshold for CIS.
Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to “end users”, i.e. they either:
From 1 March 2021 intermediary suppliers and end users need to confirm their status to their suppliers in writing to ensure the reverse charge does not apply. HMRC has provides suggested wording and clarified that intermediary suppliers can call themselves “end users” for this purpose. Should the end user fail to do this, the reverse charge will apply, and the end user will be responsible for accounting for VAT.
Invoices and VAT returns
For the domestic reverse charge, the supplier’s invoice must show all information normally required on a VAT invoice. While the VAT amount due should be clearly stated it must not be shown as VAT charged. The invoice must also include a reference to the domestic reverse charge.
The supplier only completes Box 6 on its VAT return, i.e. it only declares the net value of the sale.
The customer completes Box 1 (the VAT amount), Box 4 (the input tax amount) and Box 7 (the net value of the sale).
Business involved in the construction industry should familiarise themselves with the new rules. They should:
HMRC’s guidance provides examples of typical scenarios, the application of the domestic reverse charge in certain sectors, transactions and gives situations where HMRC will accept simplifications.
In practice if you are involved in a supply chain that will be caught by the new rules (either as a sub-contractor or main contractor), you need to confirm the following points.
We are here to help
In a recent poll, we found over 50% of individuals felt they weren't ready for 1 March 2021 and that they would need to do more regarding VAT in order to be ready for these imminent changes.
At Azets, we are here to provide help wherever it is needed. If you require further advice or guidance regarding the new domestic reverse charge rules, please get in touch with your usual Azets contact or contact a member of our VAT & Indirect Tax team.
To view HMRC’s full guidance, visit: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
Watch our webinar
On 9 February 2021 our expert advisors hosted a webinar, setting out how these new rules will work and the interaction the rules will have with the Construction Industry Scheme. Scott Craig, Veronica Donnelly, and David Hedges explained the practical implications of the imminent Domestic Reverse Charge changes, how they could impact your business and what you should be doing to prepare.
To watch our webinar recording and download a copy of our slides, click here.
Contact one of our VAT Domestic Reverse Charge specialist advisors |
Partner, National Head of VAT & Indirect Taxes E scott.craig@azets.co.uk |
VAT Partner E veronica.donnelly@azets.co.uk |
Contact our CIS expert advisor |
Partner, Head of Employment Tax E david.hedges@azets.co.uk |