Construction – all change for VAT

From 1 March 2021 there was a major change to VAT accounting for certain supplies of building and construction services. The new Domestic Reverse Charge (DRC) rules have shifted the responsibility for accounting for VAT from a VAT registered supplier to the customer.

The DRC will apply where:

  • the customer is registered for VAT in the UK, and
  • payment for the supply is reported within the Construction Industry Scheme (CIS), and
  • the services supplied are standard or reduced rated, and
  • the supplier is not an employment business supplying either staff or workers, or both.

When the DRC applies, the invoice issued by a supplier:

  • should be net of any VAT due;
  • must show that the reverse charge applies and the VAT rate; and
  • make clear that it is the customer’s responsibility to account for VAT.

HMRC’s suggested invoice wording is “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”.

VAT due from a customer where the DRC applies is included on the customer’s VAT return in Boxes 1 and 4 (to the extent that the VAT is reclaimable under the normal rules).  The net value is included in Box 7. The supplier should show the net value of the supply in Box 6 of its VAT return.

The DRC will not apply where a customer advises in writing that for that supply the customer is an:

  • End User – for example, an occupier or developer; or,
  • An Intermediary Supplier.

When the DRC does not apply, the onus is on the customer to notify its status in writing to the supplier. Without notification from the customer that it is an End User or Intermediary Supplier VAT should not be charged on impacted supplies from 1 March 2021. VAT charged incorrectly because the DRC should have applied cannot be reclaimed by the customer. HMRC guidance on end users, intermediaries and notification can be read here.

The cashflow effect of the DRC on contractors that utilise VAT paid by customers, pending submission of VAT returns, may be significant.  Such businesses may become net VAT claimants and may wish to consider changing to monthly VAT returns to facilitate the recovery of VAT on business expenditure.

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