From the 1st October 2019, a domestic reverse charge will be introduced to combat missing trader fraud for VAT in the construction industry. The domestic reverse charge will be applicable when a specified service is supplied by a subcontractor to a contractor but will not be applicable if the specified service is supplied to the end user.
The CIS scheme was introduced back in 1972. The purpose of CIS was to ensure subcontractors pay their income tax. The introduction of CIS was designed to combat income tax evasion.
From the 1st October 2019, further measures will be introduced in the Construction industry to now combat VAT fraud.
Domestic Reverse Charge?
From the 1st October 2019, a subcontractor will not charge output VAT to the contractor. The subcontractor will also need to state on their invoice that the supply is subject to a reverse charge.
The contractor on receipt of the invoice will then need to charge itself output VAT on the invoice and claim input VAT on the same VAT return. In most cases, the financial impact on the contractor will be £nil.
The new rules will only be applicable where the end user is a business or a consumer making onward supplies. If the end user is not making an onward supply, then the supplier will charge VAT in the normal way and will not be subject to the domestic reverse charges rules.
If you have a group of companies, one of which purchases construction services, the recharge of costs between the companies within the group will not be subject to the domestic reverse charge rules providing one of the companies is the end user.
For supplies being made to contractors who are making onward supplies then the domestic reverse charge rules will apply.
The general rules is that a supply being reported under the CIS scheme will also be subject to the domestic reverse charge for VAT, providing the recipient is not an end user.
HMRC have provided a list of supplies which will be subject to the domestic reverse charge rules.
How do I complete the VAT return?
If you are a supplier providing a specified service, then you would enter the net sale amount into box 6 but do not enter any amounts into box 1 of the VAT return. You will continue to claim input VAT in respect of those taxable supplies you are making.
Due to the new rules, you will not receive the output VAT from your customer, and this may affect your cash flow. However, the above will also result in you being in a repayment position from HMRC. Therefore, you may consider switching over from a quarterly VAT return to a monthly return in order to stabilise your cash flow.
Will there be penalties?
HMRC’s guidance explains that officers will operate a ‘light touch’ approach for the first six months from the date the new rules are introduced. This approach will only be taken providing the you demonstrate that you are complying with the new legislation.
As a subcontractor, it is important you identify if your customer is simply the end consumer of if it is a business making onward supplies. If your customer is making onward supplies, then you should verify their VAT number on the VIES database before applying the reverse charge rules.
As a contractor, you will want to get in touch with your subcontractors to establish if the supplies made to you fall under the specified services list.
Finally. both parties will need to understand the impact on their cashflow, ensure that your accounting systems caters for the reverse charge treatment, and provide training to staff who deal with such transactions.
General Disclaimer: This article is intended to provide general information only. The article is not intended as, and should not be taken as, financial, tax, legal, consulting, or any other type of advice. This article does not establish any contractual or engagement.