The VAT Domestic Reverse Charge is a change to charging VAT within the construction industry. It is essentially an anti-fraud measure designed to deal with ‘missing trader’ fraud, where companies charge and receive VAT from customers but have no intention of paying this VAT to HMRC.
The Domestic Reverse Charge was originally intended to start in October 2019, and then in October 2020. It has been deferred twice and will now start from 1 March 2021.
These new rules apply to Construction Industry Scheme (CIS) and VAT registered contractors and subcontractors. Under them, when a subcontractor provides construction services (reported under CIS) to the contractor, the subcontractor will no longer charge VAT. Instead it will be the contractor's responsibility to declare both the input and output VAT on their VAT return.
NB if subcontractors are not registered for UK VAT, or their supplies are zero rated, then the reverse charge will not affect them. Nor will it apply to end user customers.
If you’re a subcontractor and sell building and construction services, the reverse charge will need to be used when:
If you’re a contractor and buy building and construction services, the reverse charge will need to be used when:
For contractors, it is important for them to review their current contracts with subcontractors to check if the reverse charge VAT applies to the services they receive. If so, they’ll need to let their suppliers know.
For subcontractors, from 1 March their invoices will need to inform their customers that reverse charge VAT is applied and they are responsible for the VAT using the reverse charge procedure. Before then they should make sure that their contractor is aware and understands what is required from them.
Useful flowcharts can be found here for subcontractors and contractors.
Example wording on an invoice from a subcontractor could be something like: “Customer to account to HMRC for the reverse charge output tax on the VAT exclusive price of items marked ‘reverse charge’ at the relevant VAT rate as shown above.” In the space where the VAT amount would be, the amounts would be replaced with “reverse charge applies”. An example invoice can be found here.
For more information, click on the following HMRC links:
How to use the Domestic Reverse Charge
