VAT – domestic reverse charge for construction

The VAT domestic reverse charge for building and construction services finally came into effect on 1 March 2021. This measure is designed to combat 'missing trader' fraud in the construction supply chain.

Under the new rules, the customer (if they are VAT-registered and CIS-registered) accounts for the VAT directly to HMRC, rather than paying it to the supplier. For many sub-contractors, this has had a significant impact on cash flow, as they no longer have the use of the VAT money between receiving it and paying it over to HMRC.

How the reverse charge works

If you are a sub-contractor supplying services subject to the Construction Industry Scheme (CIS) to a main contractor, you no longer charge VAT on your invoice. Instead, your invoice must clearly state that the domestic reverse charge applies and that the customer is required to account for the VAT. The main contractor then declares both the input and output VAT on their own return, resulting in a net-zero VAT position for that transaction.

When does it apply?

The reverse charge applies to standard and reduced-rate construction services provided to VAT-registered businesses that are also registered for CIS. It does not apply to zero-rated supplies, or to services provided to 'end users' (such as a property owner having an extension built) or 'intermediary suppliers'. End users must provide written confirmation of their status to the supplier; otherwise, the reverse charge must be applied.

Managing the cash flow impact

For sub-contractors, the loss of VAT cash flow can be challenging. Because you are no longer collecting VAT on your sales, but you are still paying VAT on your purchases (like materials and tools), you may find yourself in a regular VAT repayment position. To improve cash flow, you should consider switching from quarterly to monthly VAT returns, allowing you to reclaim the VAT you are owed by HMRC much faster.