CIS: Construction Industry VAT Reverse Charge

The Construction Industry Scheme (CIS) VAT reverse charge applies to construction services from 1 March 2021.

At a glance

The CIS VAT domestic reverse charge measure will apply to supplies of construction work from 1 March 2021. The measure was due to commence in October 2019 and has been delayed twice due to Brexit and the Coronavirus.

When the reverse charge applies, the customer accounts for the supplier’s output VAT.
This measure only applies to construction supplies made by a business to business.

Key conditions

Apply the reverse charge when all the following are met:

The supply for VAT consists of construction services and materials.
It is made at a standard or reduced-rate of VAT.
Between a UK VAT, registered supplier and UK VAT registered customer.
Supplier and customer are registered for CIS.
The customer intends to make an ongoing supply of construction services to another party.
The supplier and customer are not connected.

The CIS reverse charge does not apply to any of the following supplies:

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

The CIS reverse charge does not apply to taxable supplies made to the following customers:

A non-VAT registered customer.
‘End Users,’ i.e. a VAT registered customer who is not intending to make further ongoing supplies of construction.
‘Intermediary suppliers’ who are connected, e.g. a landlord and his tenant or two companies in the same group.

The measure aims to reduce VAT fraud in the construction sector.

It will require a significant change of approach in many CIS businesses:

You will need to be able to identify relevant CIS contracts and End-Users.
Accounting and bookkeeping systems will need to be modified to cope with the new invoicing and reporting obligations (Xero and Quickbooks will be ready on time to manage this).
The use of the VAT Flat Rate Scheme and Cash accounting may not be possible. You may need to discuss how this will affect you.
Cash flow will be affected and those at the start of the supply chain may become VAT repayment claimants: they need to consider whether to file monthly returns.
It may require a business that is the recipient of the supply to VAT register.

What services are within the CIS reverse charge?

Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services.
Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
Painting or decorating the inside or the external surfaces of any building or structure.
Services which form an integral part of, or are part of the preparation or completion of the services described above.

Excluded services

Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
The professional work of architects or surveyors, or building, engineering, interior or exterior decoration and landscape consultants.
Making, installing and repairing artworks such as sculptures, murals and other items that are purely artistic.
Signwriting and erecting, installing and repairing signboards and advertisements.
Installing seating, blinds and shutters.
Installing security systems, including burglar alarms, closed-circuit television and public address systems.

Certain services can become included

If there is a reverse charge element in a supply, then the whole supply will be subject to the domestic reverse charge.
If there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
The contractor is asked to consider all construction contracts with a sub-contractor. If they can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.

HMRC example

A joiner constructing a staircase offsite and then installing it onsite is making a reverse charge service, even if the installation charge is only a minor element of the overall charge.

Treatment of existing contracts to be ready for 1 March 2021

The VAT treatment is determined for payments due on any supplies entered into your accounting system before 1 March 2021, but paid on or after 1 March 2021.

Date entered in customer’s accounting system	Date payment made	VAT Treatment
Before 1 March 2021	On or before 31 May 2021	Normal VAT rules
Before 1 March 2021	On or after 1 June 2021	Domestic reverse charge
On or after 1 March 2021	On or after 1 March 2021	Domestic reverse charge

Table showing VAT treatment on payment o

For contracts starting after 1 March 2021, you should decide whether the reverse charge applies from the start of the contract.

VAT schemes

Cash accounting cannot be used for CIS reverse charge.
Businesses will need to review their schemes.
If a business is likely to become a VAT repayable business, it will be beneficial for it to move to monthly VAT returns.

VAT payment

Where both the supplier and the recipient are VAT registered or should be VAT registered, the recipient is liable to account for and pay the VAT to HMRC on behalf of the supplier.
The supplier will not make a VAT payment on those supplies.

Invoices

When supplying a service subject to the CIS reverse charge, suppliers must show all the information that is usually required on a VAT invoice, except that:

A note on the invoice must make clear that the CIS reverse charge applies and that the customer is required to account for the VAT.
No VAT is charged on the invoice.
It should state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but that VAT should not be included in the amount charged to the customer.

Under the VAT Regulation 1995, invoices for services subject to the reverse charge where the customer is liable for the VAT must include the reference’ reverse charge’. Here are some examples of wording that meet the legal requirement:

Reverse charge: VAT Act 1994 Section 55A applies.
Reverse charge: S.55A VATA 94 applies.
Reverse charge: Customer to pay the VAT to HMRC.

Last updated: 17.11.2020

Whilst the information in this document is correct; you should always obtain individual advice from a qualified accountant.