VAT Reverse Charge for the construction industry

Introduced in March 2021, the domestic VAT reverse charge is an initiative from HMRC to address the significant amount of ‘missing trader fraud’ in the construction industry - where the trader charges and collects VAT, but then absconds with it without paying HMRC. 

Background

Under the previous rules, a business (for example a builder) added VAT to the sales invoice they passed to their customer and then accounted for these to HMRC via the VAT return. 

Now, responsibility for accounting for VAT has shifted to the customer. Where the rules apply, the trader will not charge VAT on their invoice. Instead, their customer will account for the VAT by making a reverse charge on their VAT return. In practical terms, this means that the customer will include the VAT in both Box 1 and Box 4 on the VAT return. This is a neutral process - the customer's VAT liability for the period will increase, but they will have the corresponding amount in their bank account as they won't have paid it to the trader. The rules can apply to both standard and reduced rated services, but not to zero rated services and not if the customer is the end user. 

Can your accounting package help?

The various accounting software packages now have simple ways to deal with the new rules:

Sage

QuickBooks

Xero

Can the Cash Accounting Scheme be used for services that are subject to the VAT Reverse Charge?

By way of example, this Q&A responds to a question about whether services subject to the VAT reverse charge can be accounted for using the CAS.

Q. I’m a builder who is registered for the CIS. Most of my work is as a subcontractor for several large companies. I’m VAT registered and so have been subject to the new VAT reverse charge rules since 1 March 2021. The legislation changes combined with a reduction in work due to the pandemic have seriously affected my finances. Could I use the Cash Accounting Scheme to help with this?

A: Unfortunately, you can’t use the scheme for services which are subject to the domestic reverse charge so signing up to the scheme wouldn’t be of assistance. Nevertheless, if you now find that you are submitting repayment VAT returns each quarter you can ask HMRC to allow you to submit monthly returns which will speed up your input tax claims and improve your position. The downside to this is that you will have to submit 12 VAT returns a year instead of four so you will have to weigh up the benefit against the additional administration.

More information

Please see the VAT Reverse Charge section of our Advice Hub here.

The government’s VAT Reverse Change Technical Guide can be accessed here.

The government’s guidance about when you must use the VAT reverse charge for building and construction services can be found here.

Further help

If you have any queries about the VAT Reverse Charge, please drop me a line at martin.johnson@torgersens.com. 

About the Author

Martin Johnson

Partner

With expertise in advising family-owned companies on a range of tax, accountancy and business issues, Martin also has an in-depth knowledge of the automotive and property sectors. In addition, he provides advice on inheritance tax planning and financial management to owner-managed businesses.  Martin leads the firm in developing its expertise in the buy-to-let sector, advising both residential and commercial property owners on relevant tax and legislation issues. A further element to Martin’s role is to build Torgersens’ relationships with banks, financial advisors and specialists in commercial and employment law to ensure that the firm’s clients have access to market-leading guidance.  

To get in touch please e-mail martin.johnson@torgersens.com.