Reverse Charge VAT for CIS subcontractors and how a good CIS accountant can help

If you are VAT registered and you are invoicing your main contractor for work carried out under CIS, you may be wondering if you should include domestic reverse charge VAT, which you almost certainly should be. Domestic reverse charge VAT shifts the responsibility for accounting for VAT from the subcontractor to the main contractor, and although it was introduced in 2021 many in the world of CIS are still making mistakes with reverse charge VAT. This article explains what the domestic reverse charge is, who it affects, how it works for CIS subcontractors, and how having a good accountant on your side can help.

What is the Domestic Reverse Charge VAT?

Domestic reverse charge VAT is a mechanism where the responsibility for accounting for VAT on certain supplies of building and construction services has shifted from the subcontractor to the main contractor, so from the supplier to the customer. This was introduced in the UK on March 1, 2021, as part of an effort to reduce VAT fraud within the construction industry.

Under the reverse charge system, instead of the subcontractor charging VAT to the main contractor and then passing it on to HMRC (His Majesty's Revenue and Customs), the main contractor is now responsible for accounting for the VAT on the transaction. This means that the subcontractor will not charge VAT on the invoice, and the main contractor will both report and pay the VAT directly to HMRC.

Who is Affected by the Domestic Reverse Charge?

The domestic reverse charge VAT applies specifically to businesses working within the construction industry under CIS. It affects both main contractors and subcontractors who are VAT-registered, in fact they must both be VAT registered but main contractors nearly always are.

Key points to note about the affected businesses:

• CIS-registered main contractors and subcontractors: If a subcontractor is VAT-registered and works under CIS, the reverse charge rules apply to transactions between them and their main contractor.

• VAT-registered businesses: The reverse charge applies only to businesses that are VAT-registered. If either the subcontractor or the main contractor is not VAT-registered, the reverse charge does not apply.

• Construction services: The reverse charge is specifically for construction-related services, which include labour, materials, and services used to build, repair, or alter buildings. It does not cover all construction-related activities. For example, services outside the scope of CIS or VAT, like architectural or design services, are excluded.

How Does the Domestic Reverse Charge Work?

When reverse charge VAT applies, there are several key steps involved for both the subcontractor and the main contractor.

Subcontractor's Responsibility

• The subcontractor issues the invoice without VAT. The subcontractor should clearly state that the reverse charge applies to the transaction. This is usually done by adding a note on the invoice, such as:

  "Reverse charge: Recipient to account for VAT under the domestic reverse charge VAT scheme."

  
  

Main contractor's Responsibility

• The main contractor receives the invoice without VAT. The main contractor then accounts for the VAT at the applicable rate (usually 20%) on the value of the supply.

• The main contractor reports the VAT as both output VAT (the VAT they need to pay to HMRC) and input VAT (the VAT they can reclaim, if they are entitled to do so). This essentially means the VAT is accounted for, but no actual payment is made to the subcontractor, or by the contractor.

  
  

Reporting to HMRC

• Both the subcontractor and the main contractor must report the transactions correctly in their VAT returns. The subcontractor will not report any VAT on the sale, while the main contractor will report both output and input VAT.

What Construction Services are Affected by the Domestic Reverse Charge?

Reverse charge VAT applies to a wide range of building and construction services, particularly those that fall under the CIS. This includes:

• Construction and demolition work.

• Alteration and repairs to buildings or other structures.

• Site preparation and clearance, as well as other preparatory work.

• Installation of systems such as heating, electrical systems, and plumbing.

However, the reverse charge does not apply to certain services. These include:

• Professional services such as architectural, surveying, or design services.

• Materials supply: If the transaction is primarily for materials (rather than labour), it may not be subject to the reverse charge.

• The end user must be VAT registered: The reverse charge does not apply if the main contractor is not VAT-registered, in which case VAT should be charged to them in the normal way.

Key Considerations for CIS subcontractors

Invoicing Requirements: Contractors need to ensure that their invoices clearly state when the reverse charge applies, and that all necessary details are included. Failure to do so could lead to confusion and potential issues with VAT reporting.

Record Keeping: Proper records must be maintained, as both the main contractor and the subcontractor need to report the transaction correctly on their VAT returns. The details of reverse charge transactions should be kept for HMRC inspection if needed.

Conclusion

The introduction of the domestic reverse charge VAT for CIS contractors has aimed to combat VAT fraud in the construction industry. By shifting the responsibility for accounting for VAT from the subcontractor to the main contractor, it has changed how VAT is handled in construction transactions. CIS subcontractors need to be aware of the rules, ensure they are applying them correctly, and keep accurate records to comply with VAT regulations. By understanding the reverse charge system, subcontractors can avoid errors in VAT reporting and ensure they remain compliant with HMRC's requirements.

How can a good CIS accountant help?

An accountant experienced in CIS can make sure that the correct rate of CIS deductions are applied to your invoices, and that VAT is handled correctly through the domestic reverse charge VAT system. They may do your invoicing for you or set up systems where you do the invoicing yourself, but either way it is very important to have a seasoned professional on the journey with you.

When you are busy grafting a CIS accountant can help you to get both your CIS and reverse charge VAT invoicing right first time

About the author

Dr Roger Clough, founder

Roger has a PhD in UK food retail change, has lectured extensively in business finance and accounting, and has run several businesses over three decades. As an AAT Licensed Accountant he likes to be on a journey with clients rather than the kind of accountant who just prepares the statutory accounts after the year end – meaning that advice can be given and decisions can be made before it is too late.

About Clough Accounting

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Roger Clough t/a Clough Accounting is an AAT Licensed Accountant

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