The domestic reverse charge for construction is coming

The introduction of the VAT domestic reverse charge for building and construction services has been delayed twice, but it is finally set to become law on 1 March 2021. This represents a fundamental change in how VAT is handled within the construction supply chain.

The new rules are designed to prevent missing trader fraud, where a sub-contractor charges VAT, receives payment from the main contractor, but then disappears without paying the VAT over to HMRC.

The mechanics of the reverse charge

Under the new system, a VAT-registered sub-contractor providing services covered by the Construction Industry Scheme (CIS) to a VAT-registered main contractor will no longer charge VAT on their invoice. Instead, the main contractor will account for the VAT directly on their own VAT return, declaring it as both output tax (as if they made the supply) and input tax (reclaiming it, assuming they are fully taxable).

Impact on sub-contractors

For sub-contractors, the immediate impact will be on cash flow. Because they will no longer collect VAT from their customers, they will not have that cash available to use as working capital before their VAT return is due. Furthermore, because they will still be paying VAT on their materials and overheads, many sub-contractors will find themselves in a regular VAT repayment position. Switching to monthly VAT returns can help accelerate these refunds.

Preparing your systems

Construction businesses must ensure their accounting software is updated to handle reverse charge invoices. Invoices must clearly state that the domestic reverse charge applies and indicate how much VAT is due, even though it is not added to the total amount payable. Staff involved in raising invoices and processing purchase ledgers must be trained to identify when the reverse charge applies and when standard VAT rules should be used (e.g., for supplies to 'end users').