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VAT Domestic Reverse Charge For Builders

Posted: February 4, 2021
posted: 04 February 2021

VAT Domestic Reverse Charge For Builders will be effective from 1 March 2021.

To be eligible all of the following need to apply:

  • The work is subject to CIS and both the subcontractor and contractor are registered for CIS
  • The subcontractor is VAT registered
  • The contractor is VAT registered
  • The work is subject to the standard rate or reduced rate of VAT
  • The work relates to the onward supply of construction services

Most subcontractor builders will need to move to monthly VAT returns to minimise the cash flow impact. Burgess Hodgson will be in touch to arrange this with respective clients, if you are unsure if this could effect you please get in touch with your usual Burgess Hodgson contact.

The subcontractors sales invoice must show the VAT that would be payable and the words “Reverse charge – customer to pay the VAT”.

Subcontractors should check that the contractors they are working for are VAT registered annually using HMRCs VAT checking service.

The cash accounting scheme does not apply to this – contractors should include invoices from subcontractors based on invoice date, irrespective of whether they have been paid.

The VAT Domestic Reverse Charge For Builders is excluded from the Flat Rate Scheme (FRS) – the sales are not included in the box 6 total. Therefore subcontractors should consider coming out of the FRS, otherwise they will not be getting any implied VAT recovery for materials and overheads. Where subcontractors come out of the FRS, there is the opportunity for a VAT recovery if their stock holding has increased during the period they have been in the FRS – e.g. if stock was £5k when they joined the FRS but is now £10k, they can recover input VAT on the increase of £5k. There is not a corresponding liability if their stock holding has reduced – it is a one way win.

Subcontractors cannot split their sales invoices between labour and materials to get around this.

Contractors are not allowed to recover input VAT if it has been incorrectly charged. They must only pay the net and request a corrected invoice. Contractors will include the VAT inbox 1 and box 4 of the VAT return. In most cases this will be neutral unless there is a restriction on the box 4 recovery – perhaps partial exemption or some element of private work.

If you think this could effect you or if you have any questions please either contact your usual Burgess Hodgson Contact or email info@burgesshodgson.co.uk