In order to tackle VAT evasion in the construction industry a requirement to account for VAT by way of a reverse charge is being introduced from 1 October 2019. The businesses affected will have to charge themselves the VAT which would normally be paid to their supplier.
This reverse charge will apply to all construction services which are reported under CIS, including on the value of materials supplied by a sub-contractor as part of the task performed for the contractor.
Sub-contractor A provides roofing services for contractor firm B. Currently firm A charges VAT at the appropriate rate on the invoice it issues to firm B, and B pays the VAT over to A, then firm A pays the VAT to HMRC.
Under the reverse charge, sub-contractor A will issue an invoice to firm B stating that its services are subject to a reverse charge. Firm B adds VAT to the cost of the work undertaken by A, but only within its own VAT records. Contractor B does not pay the VAT to sub-contractor A, but instead pays the VAT directly to HMRC.
There are a number of exceptions to the reverse charge listed in the new HMRC guidance, including the work of architects, and any services supplied to the end user of the building. It also doesn’t apply for transactions between connected companies (eg within a group of commonly owned businesses), or where the supplier and customer are landlord and tenant. If the services concerned would be zero-rated for VAT purposes the reverse charge is not relevant.
Written by the Tax Advice Network