Construction Industry Scheme (CIS) VAT Reverse Charge

12 Feb Construction Industry Scheme (CIS) VAT Reverse Charge

In another move to try and combat missing trader fraud in the construction sector, the Construction Industry Scheme (CIS) VAT Reverse Charge rules will finally come in to force on 1 March 2021, having being delayed twice due to the uncertainties caused by Brexit and the coronavirus pandemic.

The new rules will see the customer in the arrangement accounting for the supplier’s output VAT.

For the new rules to apply the following conditions must be met:

• The supply for VAT purposes consists of construction services and materials.
• The supply is made at a standard or reduced rate of VAT.
• The transaction is between a UK VAT registered supplier and UK VAT registered customer.
• Both the supplier and the customer are registered for CIS.
• The customer intends to make an ongoing supply of construction services to another party (i.e. they are not the end user).
• The supplier and the contractor are not connected.

The rules will NOT apply to any of the following:

• Supplies of VAT exempt building and construction services.
• Supplies that are not covered by CIS, unless linked to such a supply.
• Supplies of staff or workers.

Where the new rules apply, a supplier will invoice the customer without adding VAT to their charges. Their invoice will however need to state how much VAT is due under the reverse charge, as well as clearly indicating that the reverse charge applies using the correct terminology, for example:

Reverse charge: VAT Act 1994 Section 55A applies; or

Reverse charge: s55A VATA94 applies; or

Reverse charge: Customer to pay the VAT to HMRC.

Cloud accounting software has been altered to allow these changes to your invoicing but please contact us if you have any issues.

Where a customer is the end user, they must advise the supplier in writing of this fact and the supplier should receive this confirmation before charging VAT in the usual way – the confirmation should be retained as part of your usual business records. If no such confirmation is received, the reverse charge rules will apply.

HMRC have said that they will apply a ‘light touch’ in dealing with related errors in the first six months of the scheme provided traders are trying to comply with the legislation.

What changes will you need to consider?

• You will need to update your accounting systems.
• You should have procedures in place to ensure there is an agreement between suppliers and customers over their status and the correct accounting treatment.
• Cash accounting for VAT cannot be used for CIS reverse charge and so you will need to move to the standard method if you currently use cash accounting.
• If you use the Flat Rate VAT scheme it may be appropriate for you to change to the standard method.
• If you are the ‘supplier’ in the arrangement, this new scheme will affect your cashflow and you may become a VAT reclaimant. You may therefore want to consider changing to filing monthly VAT returns to speed up your VAT reclaims. This can be changed through your online VAT account.

If you need guidance on how the new rules apply to you, how to make the changes to your accounting systems, changing your VAT scheme or how to manage the cashflow impacts, please contact us as soon as possible and we will help guide you through the changes.