VAT Domestic Reverse Charge for Construction Companies

The VAT domestic reverse charge is now in place, having been pushed back a few months and finally taken effect on 1^st March 2021. If you own a Construction Industry Scheme (CIS) registered business, there’s a new way for you to handle and pay VAT.

What is the domestic reverse charge?

The VAT domestic reverse charge is a new procedure designed to prevent fraud from taking place within the building and construction industry. It’s in response to large volumes of “missing trader” fraud, which is when companies receive high net amounts of VAT from customers but don’t pay it to HMRC.

How does it work?

Applying to all construction businesses that are VAT registered and which supply or receive services under CIS, the change means that the customer (contractor) is now responsible for paying the VAT due to HMRC rather than the supplier (subcontractor).

What does it mean for the subcontractor?

If you’re a CIS subcontractor, you no longer charge VAT to your CIS customers and instead clearly state on invoices that the customer is responsible for it. You also need to say what rate of VAT is to be applied by the customer.

What does it mean for the contractor?

If you’re a CIS contractor, you now hold responsibility over reporting both the input and output VAT on invoices from your CIS subcontractors.

Businesses SUPPLYING building and construction services

The VAT domestic reverse charge is only applied when all of the factors below are met:

• The supply falls within the scope of CIS
• The supply is standard rated or reduced rated
• The customer is VAT registered
• The customer is CIS registered
• The customer has provided confirmation that it is NOT an end user

If one or more of the above don’t apply, the normal VAT rules remain in effect.

Businesses RECEIVING building and construction services

The VAT domestic reverse charge is only applied when all of the factors below are met:

• The supply is NOT made by an employment business
• The supply is received within the scope of CIS
• The supply is standard rated or reduced rated
• You have confirmed with the supplier that you are NOT an end user

If one or more of the above don’t apply, the normal VAT rules remain in effect.

We recommended using Xero

If you don’t already use Xero’s cloud accounting software and app, we can help you to adopt them quickly and easily. The system makes keeping track of invoices, bills and receipts extremely straightforward, especially thanks to Xero automatically handling the domestic reverse charge.

Whether you’re sending or receiving CIS invoices, Xero ensures that the right VAT information is included every time.

Need some help?

We totally understand that the above may seem a bit confusing. Whether you supply or buy services within the building and construction industry, we’re here to help you remain compliant and in control of your finances. For tailored advice, fill in our contact form and one of our specialists will get back to you right away.