Changes in VAT for CIS Services- What do you need to Know?
VAT Changes for building and construction services- Reverse Charge
VAT is changing within the construction industry and this change comes into effect from 1st October 2019.
VAT Domestic reverse charge for building and construction services is the change which is taking place.
You will be affected by this if you supply or receive specified services that are reported under the Construction Industry scheme (CIS) between VAT registered businesses, and the supply is standard rated or reduced rated for VAT.
If your invoice consists of some CIS and some non-CIS supplies, the whole supply will be subject to the reverse charge.
What is reverse charge?
Reverse charge is in effect moving the VAT amount up to the end user.
VAT registered sub-contractors will be applying the reverse charge on their invoices for CIS
supplies to VAT registered customers and therefore will not be charging the VAT on their invoice, therefore only receiving the net amount. Their customer would then account for both output VAT and input VAT on the invoice on their next VAT return.
This is going to have an impact on cashflow.
Subcontractors would normally receive the VAT element of their invoice from their customer and only pay this amount over to HMRC on their next VAT quarterly return.
Contractors will now only be paying the net amount to their sub-contractors, thereby enhancing their cashflow. Previously this VAT element was being paid out when making the payment, yet could only be reclaimed on the next VAT return. It will now be netted off on the next VAT return, and there will be no net impact on the overall VAT bill.
What you need to do to be ready for the start of the domestic reverse charge
You need to prepare for the 1 October 2019 introduction date by:
- checking whether the reverse charge affects either your sales, purchases or both
- making sure your accounting systems and software are updated to deal with the reverse charge
- considering whether the change will have an impact on your cashflow
- making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate
What contractors need to do
- If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.
- Main contractors supplying standard or reduced rated supplies to final customers of the building and construction services would not apply reverse charge. You would charge VAT in the normal way.
What sub-contractors need to do
You will need to contact your customers to obtain confirmation from them if reverse charge will apply, and confirmation of their VAT registration details. You will also need to obtain confirmation if the customer is the end user or intermediary supplier.
- Make sure your accounting systems and software are updated to accommodate reverse charge.
- Consider the impact on your cashflow. You will no longer be receiving the VAT element on your invoices from your customer which you previously held before paying this over to HMRC when you next VAT return is due.
- As you no longer pay VAT on your sales invoices you might find you become a repayment trader with HMRC (a business who receives a repayment from HMRC rather than making a payment from completing VAT returns.) Thought should be given to changing to monthly VAT returns to improve cashflow to obtain the regular repayment amounts.
What changes will need to be made on Sales invoices?
Invoices will need to clearly state that the reverse charge applies using the correct and approved terminology. HMRC Suggests to businesses to use any of the following:
- Reverse charge: VAT Act 1994 Section 55A applies
- Reverse charge: S55A VATA 94 applies
- Reverse charge: Customer to pay the VAT to HMRC
It should be clear on the invoice that the reverse charge mechanism has been applied and it should show all the usual information required for a VAT invoice.
