Reverse Charge VAT construction

Following the introduction of the VAT reverse charge system in construction on the 1st of March 2021, those working in construction may find themselves being required to fundamentally change the way they handle VAT in their business.

How does the new scheme work?

The new process requires a sub-contractor to identify when a supply falls within the rules of the Construction Industry Scheme (CIS) and whether the contractor is VAT registered. If this is the case it means that the sub-contractor does not actually charge the VAT but passes the responsibility to the contractor to account for the VAT to HMRC directly.

Why has reverse charge VAT been introduced?

The construction industry has historically suffered from a high rate of VAT fraud and the new scheme is designed to make it much harder for fraudsters to write off the VAT on purchases that are not truly for business purposes.

Who does CIS apply to?

Everyone who hires subcontractors to carry out construction work must register for the Construction Industry Scheme, no matter if you are a sole trader, in a partnership or a limited company. You must also register for CIS if your business is not in the construction industry but you spend over £1 million a year on construction.

Contractors are legally required in most cases to register for this scheme. Subcontractors, however, don’t have to register, but deductions are taken from their payments at a higher rate if they are not registered.

What counts as construction?

The government have provided a list of examples of works where CIS does and does not apply. 

CIS applies to most work on a permanent or temporary building/structure, including civil engineering works. While the term ‘construction’ has many interpretations, the government list the following examples as types of work that CIS would cover:

  • preparing the site, e.g., laying foundations and providing access works

  • demolition and dismantling

  • building work

  • alterations, repairs and decorating

  • installing systems for heating, lighting, power, water and ventilation

  • cleaning the inside of buildings after construction work

 Exceptions to CIS include

  • architecture and surveying

  • scaffolding hire — but not for erection costs

  • carpet fitting

  • making materials used in construction including plant and machinery

  • delivering materials

  • work on construction sites that’s clearly not construction, e.g., running a canteen or site facilities

What do I need to do?

If you are a contractor, you must register your business for CIS online using the government’s free tool (https://www.gov.uk/use-construction-industry-scheme-online). You are required to do this before you take on any sub-contractor after the 1st of March 2021.

Once you are set up you will be required to ‘verify’ all subcontractors using the tool before you can pay them, this will tell you how much to deduct.

As a subcontractor you do not have to register using the CIS tool. However, you may find it preferable as if you do not register for the scheme, contractors must deduct 30% from your payments instead of the usual 20%.

If you are unsure whether the VAT reverse charge applies to the services your business supplies, then the first step is to seek professional guidance on this issue.

You can contact us for more info using the form on our contacts page, call us, or speak directly to HMRC.

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