The VAT reverse charge shifts the liability for accounting VAT away from the supplier to the customer. The reverse charge is already in place for certain services and goods, such as mobile phones and computer chips. From 1st March 2021, this will apply to VAT registered businesses providing certain construction services.
The VAT Construction Domestic Reverse Charge- does it affect me?
If your company is both CIS registered and registered for VAT and if you normally charge VAT of 20% or 5% or your sales invoices, then you should consider whether the VAT Construction Domestic Reverse Charge applies to you. If it does apply to you, then from 1st March 2021, you no longer charge VAT on your sales invoices and you must disclose on your sales invoice that the invoice is subject to the domestic reverse charge.
What is the criteria for the VAT Domestic Reverse Charge?
There are a number of exceptions to this new rule which would mean you continue to apply VAT on your invoice as normal so you may be unaffected by this new rule.
Essentially these exceptions are as follows:
- If your company is acting as an employment business and supplying staff (either you as a director and/or employees), then VAT needs to be charged as normal. However, if you are making CIS supplies yourself as an individual, then the reverse charge does apply.
- Where you are making supplies to your final customer (i.e. your customer dos not pass on the service you provide to someone else). They are known as “end users” and they must tell you if they are so that you know VAT should be charged as normal on your VAT invoice;
- If you are linked or connected to the final customer or “end user” ( also known as an intermediary supplier) in the supply chain you must continue to charge VAT as normal.
If you do not meet any of the exception criteria, then you should not charge VAT on your sales invoice in line with the new VAT Construction Domestic Reverse Charge rules.
What should I do now?
We suggest that you liaise with your agency ahead of the 1ST March 2021 deadline to discuss your VAT status -as a director of your PSC, you may consider that you are “supplying staff” and such the VAT Domestic Reverse Charge won’t apply to your company and therefore you would charge VAT as normal.
The above is an outline of the guidance which is available on our FAQS portal – there is also guidance on the HMRC website too. If you require any further assistance, please do not hesitate to get in touch with our Business Advisory Team.
Who does the VAT reverse charge for building and construction services affect?
These changes will affect your company if you work on any contract covered by CIS and both:
- You and your main contractor or subcontractor are VAT registered businesses;
- The services you supply are standard rated or reduced rated;
- It does not affect you if you are deemed to be an employment business supplying construction workers (rather than as labour only contractors – you would charge VAT on your supply in this respect);
- It also does not affect you if you provide your services directly to an end user;
- Your customer has not given written confirmation that they are an intermediary supplier or an end user.
What is the main impact of the VAT reverse charge for building and construction services?
If it applies to you, then you do not charge VAT on your sales invoice – therefore there could be cash flow implications for your company. Also cash accounting cannot be used for supplies that are subject to the domestic reverse charge. Supplies that the domestic reverse charge applies to are also excluded from the Flat Rate Scheme.
When will the VAT reverse charge for buildings and construction services be implemented?
For invoices issued for specified supplies that become liable to the reverse charge, the VAT treatment for invoices with a tax point:
- Before 1 March 2021 – the normal VAT rules will apply and you should charge VAT at the appropriate rate on your supplies;
- On or after 1 March 2021 – the domestic reverse charge will apply.
As a general rule, VAT is due when a VAT invoice is issued, or payment is received, whichever is earlier.
How do you decide if you are supplying your services as a PSC either as an employment business or as a labour only contractor?
Employment businesses who are deemed to be supplying staff charge VAT on their supply as usual. However, if you supply your services as a labour only contractor then the VAT reverse charge will apply.
The simplest way to tell the difference for a supply of:
- labour only construction services – the business supplying the labour will be responsible for overseeing the completion of the work carried out by the workers;
- staff – the customer that receives the workers will be responsible for overseeing the completion of the work carried out.
Employment businesses are, for VAT purposes, treated as supplying staff rather than building and construction. For VAT purposes, such activities of workers are supplies of staff by their employer and not supplies by the workers themselves. The supplier makes a supply of staff for VAT purposes if it provides another person with the use of an individual who is:
- Contractually employed or otherwise engaged by the employment business
- A director of the employment business
Who is an end user?
These are the final consumers and final customers. They are businesses that are VAT and CIS registered but don’t make onward supplies of the building and construction services supplied to them- in this case, you would charge VAT as normal. The end user should advise their supplier or building contractor in writing that they’re an end user. If your end user is clearly a domestic consumer ( so not a business) then VAT will still apply.
What are the indicators that will determine whether your PSC is classed as a PSC either as an employment business or as a labour only contractor?
The supplying business should be treated as an employment business if these features apply:
- The customer contacts the employment business ( PSC) and asks for X workers for Y days
- The workers are employed by or engaged by the employment business
- The employment business provides an hourly or daily rate for the workers
- A timesheet is used to record the hours and days worked
- The customer sends the signed timesheet agreeing the hours and days worked to the employment business
- The customer pays the employment business
- The customer’s site foreman or managers direct and control the works carried out by the workers
- The customer is responsible for the works carried out
The supplying business should be treated as a labour only sub-contractor if these features apply:
- Customer contacts a business and asks for a skilled labourer (for example, a bricklayer, electrician or plumber) to carry out specified services
- Labourers are employed by or engaged by the business
- Business provides a price for the works or agrees a measured rate per square metre
- Supplying business is responsible for the labourer’s works
- Supplying business is responsible for correcting any defects following completion of the works
- Customer, or its representatives, agrees that the work has been carried out or certifies payment for the value of works carried out to date
The reverse charge applies to the services supplied by the business (if those services are within the scope of CIS) and VAT should not be charged on the invoices.
What do you need to do if you consider that the VAT reverse charge applies to your supplies?
- Check if your customer has a valid VAT number.
- Check your customer’s CIS registration.
- Review your contracts to decide if the reverse charge will apply, and tell your customers.
- Ask your customer to confirm whether they are an end user.
- If the reverse charge applies, your sales invoice should:
- Show all the information required on a VAT invoice;
- Make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT.