The chancellor confirmed that the CIS VAT domestic reverse charge measure will apply to supplies of construction work from 1 October 2020.
- When the reverse charge applies the customer accounts for the supplier’s output VAT.
- This measure only applies to construction supplies made by business to business.
Apply the reverse charge when all the following are met:
- The supply for VAT consists of construction services and materials.
- It is made at a standard or reduced-rate of VAT.
- Between a UK VAT registered supplier and UK VAT registered customer.
- Supplier and customer are registered for CIS.
- The customer intends to make an ongoing supply of construction services to another party.
- The supplier and customer are not connected.
The CIS reverse charge does not apply to any of the following supplies:
- Supplies of VAT exempt building and construction services.
- Supplies that are not covered by the CIS, unless linked to such a supply.
- Supplies of staff or workers.
The CIS reverse charge does not apply to taxable supplies made to the following customers:
- A non-VAT registered customer
- ‘End Users’ i.e. a VAT registered customer who is not intending to make further on-going supplies of construction.
- ‘Intermediary suppliers’ who are connected, e.g. a landlord and his tenant or two companies in the same group.
The aim of the measure is to reduce VAT fraud in the construction sector.
It will require a significant change of approach in many CIS businesses:
- Staff will need to be trained to identify relevant CIS contracts and End Users.
- Accounting and bookkeeping systems will need to be modified to cope with the new invoicing and reporting obligations.
- The use of the VAT Flat Rate scheme and Cash accounting may not be possible.
- Cashflow will be affected and those at the start of the supply chain may become VAT repayment claimaints: these businesses should consider monthly VAT returns
- It may require a business who is the recipient of the supply to VAT register.
What services are within the CIS reverse charge?
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
- Pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- Painting or decorating the inside or the external surfaces of any building or structure
- Services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
- Drilling for, or extracting, oil or natural gas
- Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
- The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
- Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
- Signwriting and erecting, installing and repairing signboards and advertisements
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
Certain services can become included:
- If there is reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge.
- If there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
- If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
- The contractor is asked to consider all construction contracts with a sub-contractor. If they can see that reverse charge applies to more than 5% of contracts with that sub-contractor, then the reverse charge may be applied to all the contracts.
- Cash accounting cannot be used for CIS reverse charge.
- A businesses will need to review their schemes.
- If a business is likely to become a VAT repayable business it will be beneficial for it to move to monthly VAT returns.
- Where both the supplier and the recipient are VAT registered, or should be VAT registered, the recipient is liable to account for and pay the VAT to HMRC on behalf of the supplier.
- The supplier will not make a VAT payment on those supplies.
When supplying a service subject to the CIS reverse charge, suppliers must show all the information that is normally required on a VAT invoice, except that:
- A note on the invoice must make clear that the CIS reverse charge applies and that the customer is required to account for the VAT.
- No VAT is charged on the invoice.
- It should state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but that VAT should not be included in the amount charged to the customer
Under the VAT Regulations 1995 invoices for services subject to the reverse charge where the customer is liable for the VAT must include the reference ‘reverse charge’.
If you need any further information or guidance, please get in touch.