Domestic Reverse Charge for the Construction Sector

Posted 24/07/2019

From the 1st October 2020, HMRC are bringing in the domestic reverse charge for construction services which will impact the construction sector’s bookkeeping and potentially software used (if their current software is not updated for this change), VAT invoices which will be required to state if the domestic reverse charge applies, and it will influence the company’s cashflow. Individuals and businesses registered for VAT in the UK will be affected; even flat rate scheme users must report the VAT element to HMRC if they receive reverse charge goods and services, so it is important that all staff who work with VAT are aware of the change.

Missing trader fraud is an issue wherein the movement of goods passed across countries or jurisdictions is VAT free. Simply, a fraud trader imports goods at zero-rate VAT and sells them on with VAT charged. The buyer reclaims the VAT from HMRC on their purchase when they buy the goods from the fraudster, whereas the fraud trader does not declare or pay the VAT to the government. The goods are then sold and exported at zero-rate and the fraud trader goes ‘missing’, and the government loses the money on the VAT that should have been paid to them.The VAT on a service would be required to be paid to HMRC by the customer, rather than being paid to the supplier which would be reflected on the VAT return submissions. The supplier would only need to put the net sales in box 6 on their tax return, whereas the purchaser would be required to put the VAT in boxes 1 and 4, and the net value in boxes 6 and 7 so that the values negate each other. The invoice from the supplier should clearly state that no VAT is charged because the domestic reverse charge applies.
The specified services would be services defined as construction for purpose of the construction industry scheme (CIS), such as alteration, construction, repair, extension, painting, decorating, installation of heating and lighting, or demolition. If there is a mixture of services that the reverse charge does and doesn’t apply to then all services should be treated with the reverse charge; the full list is with HMRC for consulting should uncertainty around a service arise. It should be noted that the reverse charge applies to the entirety of the service supplied whereas CIS tax does not include deductions on materials.
Where the service is zero-rated, or the customer is not VAT registered, the reverse charge rules will not apply.Cash accounting schemes cannot be used for services supplied that fall within the reverse charge rules, which will force some companies to change they way they account for their sales and purchases. Using accrual accounting basis may impact the monthly cashflows for a company as they adjust to a different accounting scheme, and their accounts are likely to show an increase in debtors and creditors at the period end.

Tags: VAT, Reverse charge, Domestic reverse charge, CIS