VAT Construction Industry Reverse Charge starts March 2021

11th January 2021

From 1 March 2021, the VAT treatment of some supplies in the construction industry will change.

For standard-rated or reduced-rated supplies which fall within the Construction Industry Scheme (CIS) direct tax scheme a VAT reverse charge will apply.

This means theĀ supplier will not charge VAT on qualifying supplies, and VAT will be accounted for and reclaimed by the customer on their VAT return.

The reverse charge will apply to the following supplies:

  • Within CIS
  • Not made by employment businesses (although labour only sub-contractors are included)
  • Subject to VAT at the standard (20%) rate, or the reduced (5%) rate
  • Not made to end users (i.e. customers including consumers and businesses involved in developments etc. where no onward supply of the construction services will be made)
  • End users (apart from consumers) are required to confirm their status in writing.

Cashflow impact

For sub-contractors who can no longer charge VAT on invoices, there will be a cashflow disadvantage as they would previously have received payment of the VAT before needing to pay it to HMRC on a quarterly VAT return.

For main contractors there will be cash flow advantage, as they will no longer have to pay VAT to sub-contractors in advance of being able to reclaim it from HMRC.

For businesses acting in both capacities, the cashflow impact will depend on the relative values of both types of supply and should be modelled in advance to assess the impact.

Further reference

The government has published a Technical Guide to the VAT reverse charge.

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