The domestic reverse charge for VAT on construction services

Domestic reverse charge VAT legislation is about to change the way CIS registered construction businesses handle and pay VAT.  From 1 March 2021, many contractors in the construction industry will stop paying VAT to their subcontractors.  Instead, the contractor will pay the VAT directly to HM Revenue & Customs.

This “domestic reverse charge” (DRC) will have a number of consequences for many businesses.  For many businesses, the new rules are an additional complication, and it will be important to get things right to avoid problems with invoices or with HMRC.

What does it mean for you?

As well as knowing the rules of when to apply the DRC, businesses will need to be aware of its wider ramifications.

If you are a CIS subcontractor, you will no longer charge VAT to your CIS customers.  Instead, on your invoices you need to state your customer is responsible for the VAT and show what VAT rate should be applied.

If you are a CIS contractor when you receive a bill from your CIS subcontractor, you are responsible for reporting both the input and output VAT on that bill.

This change will affect your cash flow and your accounting processes for example, if you are a contractor your cash flow will be improved but, a subcontractors’ cash flow will be worsened.  Subcontractors will no longer have the benefit of holding the VAT until it is due to be paid to HMRC.

Furthermore, some subcontractors will become VAT “repayment traders”, incurring more input VAT on materials and overheads than the output VAT they charge to customers.  As a result, they will regularly reclaim VAT from HMRC instead of having to pay HMRC.  If you will be in this position, you should consider changing to making monthly VAT returns, to get your VAT repayments more quickly and to mitigate the hit to your cash flow.

If you will be affected by the DRC legislation coming into place on 1st March 2020, it is important that you are prepared and up to speed on what you need to do in order to avoid timely and costly invoice errors and HMRC consequences.

If you would like to know more…we invite you to our zoom webinar on Wednesday 17th February at 9.30am where Jo and Toby will explain the changes in more detail, and you will have the opportunity to ask questions.  To book your place or for further information please email us. 

Make sure you check out the DRC details on the website too.