VAT Reverse Charge: 1 March 2021 update.
The Construction Industry Scheme (CIS) VAT reverse charge applies to construction services from 1 March 2021. Please note this only applies to construction supplies made by a business to business that are both VAT registered.
VAT Reverse Charge – key conditions
When the following conditions are met, the reverse charge scheme must be applied:
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 (sub-contractor) and UK VAT registered customer (contractor).
Supplier and customer are registered for CIS.
The customer intends to make an on-going supply of construction services to another party.
The supplier and customer are not connected.
The CIS VAT 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 VAT 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 on-going supplies of construction such as a landlord.
‘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.
Changes required within a business:
Accounting and bookkeeping systems need to be modified to cope with the new invoicing and reporting obligations. Cloud accounting systems such as QuickBooks and Xero will have VAT codes that will process the VAT correctly when used.
The use of the VAT Flat Rate Scheme and Cash accounting cannot be used with this scheme.
Cash flow will be affected, and some sub-contractors may become VAT repayment claimants: if this is the case, it may be beneficial to file monthly returns.
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.
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 |
For contracts starting after 1 March 2021, you should decide whether the reverse charge applies from the start of the contract.
Invoices
When supplying a service subject to the CIS reverse charge, suppliers must show all the information that is normally 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. The note could be as follows – Reverse charge: Customer to pay the VAT to HMRC.
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.
Last updated: 01.03.2021
Whilst the information in this document is correct; you should always obtain individual advice from a qualified accountant.