These FAQs supplement our article on Reverse Charge for Domestic Construction Services that we previously published on our website. That article explains the basic rules and is not superseded by this list of FAQs.
1. How does the reverse charge work?
If you supply services within the reverse charge, you do not add VAT to your bill to your customer. Instead, the customer will account for the VAT to HMRC. If you receive reverse charge supplies, you should not be charged VAT by the supplier, but need to show the VAT that would otherwise have been payable as part of your own output tax. You can also treat the same amount as input tax on your VAT return so if you are a fully taxable person, the two entries will cancel one another out.
2. When does the reverse charge apply?
You have to apply the reverse charge if you supply or purchase construction services and your customer is both registered for VAT and registered under HMRC’s Construction Industry Scheme (CIS). You should not use the reverse charge for supplies to consumers or non-VAT registered businesses. You also should not use the reverse charge if your supply is to an end-user or an intermediary supplier.
3. What if my customer does not have a CIS registration?
You should not use the reverse charge if your customer is not registered under CIS. Supplies to non-CIS registered businesses do not fall within the reverse charge.
4. What is an end-user?
It is a VAT-registered business (or one that is required to be VAT-registered) that uses your services for a purpose other than making further supplies of construction services. Such a person may well be registered as a contractor under CIS. It will include house builders and developers who make onward supplies of the completed building, not of construction services. A person who is not required to be VAT-registered because it does not carry on a business, is also an end-user. Your customer is required by law to tell you if it is an end-user.
5. What do I do if my customer has not told me that he is an end-user but I suspect that it is?
First check that he has not told you. We suspect that in most cases the notification will be contained in the construction contract. If your customer has indeed not told you before you supply your services, you are required to treat your supply as a reverse charge supply.
6. What is an intermediary supplier?
An intermediary supplier is a person who receives construction services and makes an onward supply of them to another person without material alteration or further processing. However, to be an intermediary supplier, it must either be:
- connected with the expected end-user of the services as a group undertaking within Companies Act 2006, s 1161, i.e. a parent, subsidiary or a sister company, or
- both the expected end-user and the intermediary supplier must have an interest in the land, building or civil engineering work concerned, as a landlord, lessor, licensor, tenant, lessee or licensee
Again, you must treat the supply to an intermediary supplier as a reverse charge supply unless it has notified you before the services are performed that it is an intermediary supplier.
A design and build company is normally an intermediary supplier. So is a developer’s in-house building company.
7. What are the rules for employment businesses?
The VAT legislation distinguishes between labour-only sub-contractors (who are within the scope of the reverse charge as they supply a construction service) and employment businesses (which supply staff, not construction services). If the supplier employs or engages the worker, quotes an hourly or daily rate for the worker’s services, requires time-sheets to be completed and approved by the customer, and pays the workers that it supplies, it will normally be an employment business so will need to charge VAT in the normal way.
8. What if some of the services that we supply to a builder are reverse charge supplies and some are not?
HMRC say that once you have made a reverse charge supply, you can agree with the customer to treat all further construction supplies that you make to it on the same construction site as reverse charge supplies.
9. Can I agree with the business customer who operate several building sites to treat all supplies of construction services to him as reverse charge supplies?
No, you can only agree in relation to supplies on a single site.
10. We sell doors to builders. Sometimes we fit them and sometimes they do it themselves. When we fit them, does the reverse charge apply to the fitting element?
A supply cannot be split. If it contains any construction services, the entire supply is a reverse charge supply. However, HMRC accept a 5% de minimis exclusion. The supply of the door together with fitting it, is a reverse charge supply if the labour element is more than 5% of the overall charge. Otherwise, it is not.
11. What if we invoice separately for the fitting service?
It makes no difference. Whether it is a single supply or two separate supplies is a question of fact. You cannot change the nature of the supply by using two invoices.
12. What if I just sell the door and arrange for a fitter to fit it and bill the customer direct for his services?
There would be two supplies, as a single supply cannot be made partly by one person and partly by another. Your supply will not be a reverse charge supply, but your fitter’s will.
13. Does the 5% de minimis apply only to the supply of goods together with fitting them?
No, it can be used in the case of any mixed supply. For example, suppose a carpenter contracts both to carry out work at a developer’s office and at one of his development sites. The developer would be an end-user in relation to the work at the office, but a contractor in relation to the work at the development site. If the work at the development site is more than 5% of the whole supply, the entire bill becomes a reverse charge supply; if it is less than 5%, there is no reverse charge supply.
14. I use cash accounting. How do I deal with the reverse charge?
You cannot use cash accounting for supplies of services that are subject to the reverse charge.
15. What about if I use the VAT flat-rate scheme?
You cannot account for VAT on reverse charge supplies under the flat-rate scheme. You will need to treat any reverse charge supplies as being outside the flat-rate scheme.
If most of your supplies will be reverse charge supplies, it is unlikely to be beneficial to continue to use the flat-rate scheme. This gives you no relief for VAT on your purchases, in return for a lower rate of VAT on sales. As under the reverse charge there is no VAT on sales (other than zero-rated sales) that means that you are forgoing VAT recovery on your purchases but receiving no benefit in return for doing so.
16. How do I deal with the reverse charge on my VAT return?
You need to include the sale in turnover on your return but there is nothing to be shown in the “output tax” box.
If you receive reverse charge supplies, you need to show the VAT as output tax on your VAT return, but do not include the amount of the supply as a sale. This is different to other reverse charge rules where you are required to treat the item as a sale by you to yourself.
You can claim relief for the VAT amount as input tax on the same return. This means that if you are a fully taxable person (or if the input tax relates wholly to taxable or reverse charge supplies by you) you show the same amount both as input tax and as output tax. You include the purchase price in your purchases figure, but do not include the deemed sale that you make to yourself in your supplies figure.
17. What do I show on my invoice?
You need to include all the normal information that is required for a VAT invoice, including whether the supply is a standard-rated or a reduced rate supply and the amount of the VAT. However, you should include the VAT as a memorandum figure, not as part of the charge that you are making to the customer.
You also need to state on the invoice that it is a reverse charge supply. Our suggested wording is, “This is a reverse charge supply under VATA 1994, s 55A. You are required to pay the VAT amount to HMRC”.
18. What if I need to issue a credit note in respect of a reverse charge supply?
You should again not show the VAT as a reduction in the price and should include wording on your credit note to alert the customer to the fact that he needs to adjust his own VAT return. We suggest, “As the initial supply was a reverse charge supply under VATA 1994, s 55A, you are required to account to HMRC for the output tax adjustment of £X”.
If you receive a credit note in respect of a reverse charge supply to you, you should reduce the output VAT on your return by the VAT adjustment but should not deduct the credit note from your sales figure. If you claimed relief for input tax on the original supply, you also need to adjust both the amount of your input tax and the amount of your purchase in the normal way. HMRC say that if you have not submitted your VAT return at the time you give or receive a credit note, you can treat the credit note as received at the time of the original supply and only show the adjusted amount on your return.
19. What is the position on contracts where the work started before 1st March 2021?
You must treat the supply as a reverse charge supply if the tax point (which is the earlier of the invoice date or the date of payment) is after 28th February 2021, even though some of the work may have been carried out before that date. HMRC say that if you use authenticated receipts instead of VAT invoices and the payment due was entered into your accounting system before 1st March 2021, you need not use the reverse charge if the payment is made by 31st May 2021.
20. How do I deal with a credit note that relates to a supply made before 1st March 2021?
You should treat it as being outside the reverse charge rules as it is a correction to the amount of a supply that was not itself within the reverse charge.
21.What if the construction project is a joint venture?
The joint venture will either be registered for VAT as a partnership or one of the joint venturers will deal with the VAT on the project. If the joint venture companies charge the project for staff that work on it, the secondment is a VATable supply of staff to which the reverse charge does not apply.
Click here to read our full article on reverse charge for domestic construction services.
For more information, please contact Thomas Adcock, Tax Partner.