Reverse Charge VAT for Construction Subcontractors
If you invoice a contractor for CIS work and you are VAT-registered, your invoices change. Here is what changes.
If you are a construction subcontractor, you may no longer charge VAT on some of your invoices. Which ones?
As of 1 March 2021, the VAT is changing for subcontractors in the construction industry.
Does it apply to you?
It applies to any subcontractor where all four of these are true:
- the CIS rules apply to them, and
- they are VAT-registered, and
- the contractor is VAT-registered, and
- the VAT is at the Standard or Reduced rate.
It applies to any invoice subject to CIS, which means one with labour involved.
If the invoice is for labour plus materials, the rule applies to the whole invoice, materials included. If the invoice is for materials only, it is not subject to CIS and this rule does not apply.
One important note: this also applies even if the subcontractor has gross status!
What changes on your invoice
If you invoice your contractor (NOT the end-user) and you are VAT-registered, you now adjust your invoices like this:
- Note on the invoice: "Reverse Charge is being applied".
- Still note the VAT percentage and the amount of the VAT, but do NOT add it into the total of the amount due.
You will no longer be charging VAT, or paying VAT to HMRC, on the applicable sales.
What your contractor does
Your contractor receives the invoice with the NET amount being charged. They process it as zero-rated with a reverse charge.
That means the VAT that would have applied is both added to their VAT payable and added to their VAT re-claimable. The total is a zero charge.
Two things worth looking at
A subcontractor with mostly zero-rated reverse-charge invoices could end up mostly reclaiming VAT on their VAT return. If that causes cash flow problems, they may want to think about changing to monthly VAT returns, so they reclaim the VAT on their expenses more often.
If the subcontractor is on the Flat Rate Scheme of VAT, they may want to think about changing to another scheme, as staying on it will probably end up costing them money. If this is you, please talk it over with your accounting professional.
Why the change?
It is to combat fraud. Some subcontractors apply for a VAT number, get paid for labour plus VAT, and then disappear. HMRC never collects that VAT.
For more information, there is a website with flow charts: the gov.uk reverse charge technical guide.
If I can help with this subject, please contact me.
As always, keep it simple and... Flourish and Prosper
Lisa
P.S. If you would like me to look at your own invoices and VAT and tell you plainly where you stand, call me on 07729 524611 for my free consultation, because it is better to know before your next VAT return than after.
