As of March 1st, 2021 HMRC, are introducing the Domestic Reverse Charge on the construction Industry for VAT having failed to implement the arrangement in October 2019 & October 2020.

Check when you must use the VAT reverse charge for building and construction services

This will impact on any business that is CIS & VAT registered.

Currently under usual rules the supplier would have accounted for the VAT (e.g. adding 20% to their sales invoices) and subsequently paying this over to HMRC. Moving forward where the DRC applies, the reverse charge will move the requirement of accounting & paying the VAT from the supplier to the customer (so now the customer will instead pay the VAT directly to HMRC, accounting for the Output tax on their own VAT return instead of making payment to the supplier).

The implementation is the latest attempt by HMRC to reduce the nation’s tax gap (expected v actual tax collections). Rouge traders within the construction industry have been known to receive VAT from their customer and never pay the tax over to HMRC, seemingly disappearing into thin air with the nation’s tax revenue.

The domestic reverse charge only applies to the supply of services that fall within the scope of Construction Industry Scheme (CIS) where both parties to the transaction are registered for CIS and VAT and the transaction should be liable for VAT at either 5% or 20%.The reverse charge will not apply where the customer is an end user (ie the construction service being received by the customer is not being sold on – for example a construction project on a head office). A flow chart provided by HMRC can be downloaded below.

There can be significant risks to your cash flow as well as the risk of paying VAT to your suppliers in error (HMRC have the power to assess the VAT back on the customer where incorrectly implemented). We are already helping other customers ensure they are getting it right. Get in touch to see if we can help you implement the necessary changes.