VAT reverse charge on CIS

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If you’re registered under the construction industry scheme (CIS) and having a VAT registered business, this information might impact you as a construction service supplier. The CIS VAT reverse charge was due for implementation in October 2019 and further delayed 2 times due to Brexit and Coronavirus will now be implemented on 1 March 2021.

CIS VAT Reverse charge

VAT reverse charge is an anti-fraud measure designed by HMRC to combat VAT fraud in the building and construction sectors. As per the new VAT reverse charge, the supplier of construction services does not account for VAT, and from now onwards the end customer will be accountable for paying VAT. It means that customer receiving construction services need to pay the VAT directly to HMRC rather than paying to the supplier. VAT reverse charge only applies to the supplies of construction services made by one business to another and creates a significant impact on VAT compliance and cash-flow. If there is no further supply of the same construction services and you’re the end customer, normal VAT rules apply.

Why has it been introduced?

HMRC believes that the construction industry has been widely exposed to frauds, mainly a missing trader fraud, which is happening nowadays in big numbers. Missing trader fraud is when a VAT is charged by the sub-contractor from its customer but disappears after doing a few months of trading. Due to such instances, HMRC loses out on VAT, which a subcontractor needs to pay to HMRC.

Thus, a measure named “CIS VAT reverse charge” has been introduced by HMRC to restrict this VAT fraud. As a result, VAT reporting and payment passes to the customer. This measure will be implemented on 1 March, 2021.

VAT reverse charge on CIS

When the VAT reverse charge applies?

VAT reverse charge applies when all the following conditions are met –

  1. Both supplier and customer must be registered under CIS.
  2. It applies to the supply of construction services and materials.
  3. The transaction of supplying construction services and materials should take place between a UK VAT registered supplier, and UK VAT registered customer.
  4. It should be made at VAT standard/reduced rate.
  5. The supplier and customer are not connected.
  6. A VAT registered customer intends to make ongoing supply of construction services and materials to another party.

What services come under VAT reverse charge?

It is vital to use reverse charge for the following services –

  1. Construction, extension, alteration, repair, demolition or dismantling of buildings or structures (temporary or permanent), including offshore installation services.
  2. Construction, extension, alteration, repair, demolition of any works, forming or planned to form a part of the land, including roadworks, walls, sewers, wells, watermains, pipelines, power lines, electronic communications equipment, railways, aircraft runways, docks and harbours, inland waterways, reservoirs, industrial plant and installation for purposes of land drainage, protection of coast or defence.
  3. Cleaning the interiors of buildings and structures to be carried out during construction, extension, alteration, repair or restoration.
  4. Installation of lighting, heating, power supply, air-conditioning, ventilation, water supply, drainage, sanitation or fire protection systems in any building or structure.
  5. Decoration or painting of external or internal surfaces of any building or structure.
  6. It also includes services thatform an integralpart of services preparation or completion such as site clearance, excavation, earth-moving, laying of foundations, tunnelling and boring, site restoration, landscaping, erection of scaffolding, roadways provision and other access works.

What services are excluded from CIS reverse charge?

Don’t use reverse charge for the following services –

  1. Extraction of oil or natural gas/Drilling for oil or natural gas.
  2. Extraction of Minerals, tunnelling, boring or underground work construction.
  3. Manufacturing components for lighting, heating, power supply, air-conditioning, ventilation, water supply, drainage, sanitation or systems of fire protection, or delivering such components to site.
  4. Manufacturing building or engineering components or materials, equipment, plant or machinery or delivering such components to site.
  5. Making, installing and repairing works related to art such as sculptures, murals, and other purely artistic items – Installing and repairing signboards, signwriting and writing, advertisements etc.
  6. Professional work by Architects or surveyors, or related to engineering, building, exterior or interior decoration and landscape consultants.
  7. Installation of security systems, such as burglar alarms, closed-circuit television and public address systems.
  8. Installation of seating, window blinds or shutters.

To whom CIS reverse charge does not apply?

CIS reverse charge does not apply to the supplies made to the following –

  1. Non-VAT registered customer
  2. End-users (Normal VAT rules apply)
  3. Connected intermediary supplies (such as a landlord and his tenant in the same group/two companies in the same group)

How does the CIS charge work?

CIS charge, which will implement on 1 March 2021, applies to VAT-registered businesses that provide construction services to other VAT registered businesses. The CIS reverse charge does not apply to supplies of zero-rated services such as housing construction. When the construction services are not further supplied by the VAT registered businesses and they gave the confirmation that they are the end customers, normal VAT rules apply.

For example, suppose a subcontractor supplies construction services to a customer (or contractor), who further makes supplies of the same construction services to another customer. When a customer gives the confirmation that they are the end customer in the supply chain, normal VAT rules apply.

Example as per current VAT rules

Suppose, a subcontractor invoices a customer (contractor) with £1,000 plus VAT of £200. As per the current VAT rules, the contractor would be liable to pay £1,200 to the subcontractor (ignoring CIS tax).

Subcontractors VAT return

As per the above example, while making a VAT return, the subcontractor would include the VAT amount of £200 in box 1. If there is no further transaction, a subcontractor needs to pay £200 to HMRC.

Contractors VAT return

Here, contractors would include the VAT amount of £200 in box 4. If there is no further transaction, the contractor will reclaim £200 from HMRC. Hence, as per the current rule, HMRC will be going to lose a VAT amount of £200, if the subcontractor does a missing trader fraud.

Example as per new VAT reverse charge

Using the same example, a subcontractor invoices a customer (contractor) with £1,000, but the new VAT reverse charge applies. As per the new VAT reverse charge, the contractor would be liable to pay £1,000 to the subcontractor (ignoring CIS tax)

Subcontractors VAT return

While making a VAT return, the subcontractor would include a nil amount in box 1 but still declare the amount of £1,000 as a net sale in box 6. If there is no further transaction, a subcontractor will not pay anything to HMRC.

Contractors VAT return

The contractor must account for the VAT reverse charge while making their return. Hence, it will be included as sales of £200 in box 1 of their IT return and input recovery amount of £200 in box 4. Thus, a contractor has nothing to pay or claim from HMRC.

Hence, as per the new VAT rules, the subcontractor doesn’t receive the VAT of £200 from the customer. Thus, HMRC easily avoided missing trader fraud.

How can Korklin help?

Korklin, a DNS company is a renowned, multi-award-winning accounting firm based in the UK, with over 10 years of expertise in offering a complete range of Accounting and Financial Services. We have achieved substantial growth in the last 10 years and served thousands of sole traders, small businesses, contractors, freelancers, landlords as well as private clients. We are specialised in providing Bookkeeping, Payroll, Self-assessment, Construction industry scheme (CIS), VAT returns, Property tax and all other types of Accounting and Tax Preparation services.