VAT Reverse Charge and The Construction Industry
From 1 October 2020 VAT registered contractors will have to account for VAT on services under the new VAT Domestic Reverse Charge rules.
If you are a VAT register business who supplies construction services to another VAT registered business for onward sale you will be required to issue a VAT invoice stating that the service is subject to the reverse charge. The recipient must then account for the VAT due through its VAT return instead of paying the VAT to the supplier. In effect the recipient pays the output VAT and reclaims the input VAT on its VAT return.
Main contractors will also have to withhold VAT from VAT registered subcontractors and pay it to HMRC on their behalf through the Construction Industry Scheme (CIS) returns.
The reverse charge applies to services which fall within the Construction Industry Scheme, including construction and alterations to buildings or structures.
The reverse charge rules will not apply where the customer is the end user or a domestic customer or where the supplies are exempt or zero rated.
HMRC believe that the new rules will help reduce fraud and improve recoverability of VAT but have acknowledged that will initially cause some difficulties in practice.
Contact Patton Rainey and Associates if you need any further clarification or assistance in meeting the new accounting and reporting requirements.