Reverse charge for construction service
Part 1 Introduction
If you’re involved with the construction industry, you’ll doubtless be aware of the new rules from 1 October. These new rules are an avoidance measure to prevent VAT fraud in the construction industry. You can read HMRC’s detailed guidance here.
This is the first in a number of short articles about the new rules. In this article, I’ve explained the basic principles of the scheme and where to find more information about the reverse charge scheme.
Extending the Construction Industry Scheme (CIS)
In principle, it’s like extending the existing CIS to VAT. Under the CIS, the contractor deducts income tax from a sub-contractors’ pay and pays the tax to HMRC. The reverse charge operates in a similar way.
Under the current VAT rules, a VAT registered sub-contractor issues invoices to contractors for their net payment plus VAT. The sub-contractor includes the VAT charged as output tax on his VAT return and pays the VAT to HMRC. The contractor can claim the VAT back under the normal VAT rules.
The term “reverse charge” is because the liability to pay the VAT is reversed from the supplier – in this case the sub-contractor – to the customer; i.e. the contractor.
The VAT “reverse charge” procedure.
Under the new VAT rules, called the “reverse charge”, sub-contractors won’t charge VAT to the contractors. Instead, the contractors will have to pay the VAT on the services (and related goods supplied by the sub-contractor) concerned to HMRC.
Under the reverse charge for construction services, contractors will include the VAT on the services and related goods as output tax on their VAT return. Like the current system, the contractor will be able to claim the VAT back under the normal rules.
The reverse charge is based on very similar principles to the CIS. One of the most important factors is that the reverse charge only applies if the contractor concerned is both registered for VAT AND registered for VAT. However, there are some differences and I’ll be discussing these in more detail in future articles.
If you’re developing as a business activity, see my pdf book VAT for residential property developers and contractors or in paperback from Amazon.
Like the CIS, the reverse charge for construction services is an anti-avoidance measure designed to prevent VAT fraud in the construction industry.
The reverse charge as a procedure was originally introduced in the 1970s when the UK joined the “Common Market”; the predecessor of the European Union. At that time, it was used to collect VAT on imported services from overseas suppliers. However, in the decades since, HMRC has extended the reverse charge to certain businesses that are high-risk in terms of VAT avoidance. For example, it also applies to sales of mobile phones and computer chips to businesses.
For more information about the reverse charge, you can read my article Demystifying the reverse charge. In future articles, I’ll explain exactly which contractors are is liable to use the reverse charge, some differences between the CIS and the reverse charge and other technical information, including WHEN the VAT sub-contractors and contractors should include the transactions on their VAT returns.
In the next article in this series, I’ll explain how contractors and sub-contractors should include the transactions on their VAT returns and the information sub-contractors must include on their reverse charge invoices.