Reverse Charge for Construction Services

Reverse Charge for Construction Services

With effect from 1 October 2019, there will be a change to the way that VAT is accounted for in relation to VATable construction supplies that fall within the remit of the Construction Industry Scheme (CIS).

Presently, if a sub-contractor makes a supply to a business, the sub-contractor will issue an invoice, which the business settles. The business reclaims the VAT paid as input tax and the sub-contractor pays over the VAT as output tax.

Sometimes, when a business customer has paid the invoice and reclaimed the VAT, the sub-contractor does not pay the VAT as output tax to HMRC and so gains a cash advantage.

To combat this fraud, HMRC will introduce the reverse charge.  The reverse charge is a mechanism which puts the responsibility for paying over the output tax to HMRC on the VAT registered business customer.  The seller will not charge VAT to the business customer.  Therefore, what will happen is that for supplies made on/after 1 October 2019, a sub-contractor will not charge VAT, but the business customer will pay over output tax to HMRC and in the same VAT return, reclaim it.  The business customer is in the same position, but no cash moves.  This will prevent sub-contractors from disappearing with cash received which should be ear-marked to pay output tax to HMRC.

The new rules will only affect supplies that fall within CIS between VAT registered businesses where VAT would have been charged (so not zero-rated supplies): ‘End-Users’ and those connected to End-Users are excluded. End-Users essentially comprise deemed contractors for CIS purposes.  A connection with an End-User will include supplies between landlords and tenants and group companies.  The new rules will affect both services and goods supplied with construction services.

It will therefore be important to understand what services are affected and whether a supply is excluded.  If an End-User exists, they should make their status known.

If you would like to discuss this further please contact Karen Davies –