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CIS VAT Reverse Charge

From 1 March 2021 the domestic VAT reverse charge is a substantial change to the way VAT is collected in the building and construction industry. It must be used for most ‘VAT-able’ supplies of building and construction services.
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What are the key VAT changes?

HMRC has been working on the reverse charge over the past few years. The aim is to tackle VAT fraud in the construction industry, specifically missing trader fraud, by making it the responsibility of the contractor or receiving sub-contractor to account to HMRC for VAT on applicable transactions.

In other words, a contractor will no longer pay VAT over to their sub-contractor and will instead pay it directly to HMRC via their own VAT return.

Who and What does the VAT reverse charge apply to?

You must use the reverse charge for the following services:
  • constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services.
  • constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
  • internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
  • painting or decorating the inside or the external surfaces of any building or structure.
  • services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

Do not use the charge for the following services, when supplied on their own:

  • drilling for, or extracting, oil or natural gas.
  • extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose.
  • manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
  • manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
  • the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
  • making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements.
  • installing seating, blinds and shutters.
  • installing security systems, including burglar alarms, closed circuit television and public address systems.

You should be reviewing your relationships with your suppliers and customers to see which of your trading relationships will be impacted by the reverse charge change.

Two key things to look out for when considering where the new rules need to be applied:

  • 1: If the invoice is for services that fall within the CIS (both labour and materials) then the reverse charge will apply – even if the sub-contractor is not registered for the CIS.
  • 2: The change only applies to individuals or businesses that are registered for VAT in the UK – it will not apply to end users, consumers (individuals), if the service is zero rated or if a sub-contractor is not registered for VAT.2
There is a more exhaustive list of services impacted by the domestic reverse charge on the HMRC website. This excludes services that are excluded from the CIS.Once affected trading partners have been identified, businesses are advised to contact them. For contractors, this will mean notifying sub-contractors that the reverse charge will apply to services. Contractors should do this now as the change will impact the cash flow of sub-contractors, which may lead to issues on projects.In the absence of notification, sub-contractors should contact their customers for confirmation that the reverse charge will apply. The reverse charge should not be applied to supplies to end users and intermediary supplier businesses. End users are deemed to be consumers or final purchasers of building and construction services.End users may be registered for VAT and CIS, for example property developers who do not make onward supplies of building and construction services. In cases where sub-contractors are in doubt about their customer’s status as an end user, they should request confirmation in writing to determine if they need to apply the reverse charge to invoices.Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users.If you are unsure about whether you need to apply the reverse charge, the below questions should help:

If you sell building and construction services…

Use this flowchart (Annex 1) to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:

  • your customer is registered for VAT in the UK
  • payment for the supply is reported within the Construction Industry Scheme (CIS)
  • the services you supply are standard or reduced rated
  • you’re not an employment business supplying either staff or workers, or both
  • your customer has not given written confirmation that they’re an end user or intermediary supplier
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