On 1st March 2021 new rules will be introduced that will change how you account for VAT if you are in the Construction Industry Scheme (CIS) and are VAT registered. The new rules can be a little difficult to understand so in this blog, we have put together a handy guide to help explain the VAT Domestic Reverse charge, the reason for this change and what this means for you.
What is the VAT Domestic Reverse Charge?
The reverse charge is a way to account for VAT, whereby the end customer accounts for VAT on specified services, and the supplier of the construction or building services does not. This means the customer receiving these services has to pay the VAT directly to HMRC instead of the supplier. This shift in responsibility will only affect businesses within the supply chain that provide CIS services.
Why have they made this change?
HMRC announced the introduction of the VAT Domestic Reverse Charge in 2017, in an aim to reduce a type of VAT Fraud commonly seen in construction supply chains, referred to as ‘missing trader’ fraud. This is when inactive companies set up to steal VAT whilst working alongside legitimate businesses. It was initially due to come into play in October 2018 but was pushed back twice due to Brexit and the unprecedented Coronavirus pandemic.
How does this affect me?
It really depends on your position in the supply chain. Employment Business, Intermediaries and other business that provide support or services to the CIS industry are not subject to this change. This is good news if this is you, however, it’s important to be aware that there may still be an impact to the supply chain that in turn could affect you.
The VAT Domestic Reverse Charge will apply:
- If the supply of services falls within the scope of CIS, and
- The services are NOT supplied directly to an end customer, and
- The services supplied are listed within the ‘specified services’ in article 5, and NOT listed within article 6, of the Statutory Instrument for VAT Reverse Charge for Building and Construction Services.
It’s also worth noting that the charge can only affect the specified services, between VAT registered companies and there cannot be a connection between said companies, such as being within the same commercial group. Further to this, only the standard rate or reduced rate supplies will be affected.
We have included a handy flowchart below to help you work out if you should apply the reverse charge or whether normal VAT rules apply.
Need more information? The Azure Global team are here and happy to help if you believe that the new reverse charge VAT rules apply to your business. Contact our friendly, knowledgeable staff today to discuss what we can do for you.