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Construction Industry Scheme VAT Reverse Charge (RC)

The way VAT is charged for supplies made under the Construction Industry Scheme (CIS) changes from 1 March 2021.

For supplies covered by the change, no VAT should be charged on invoices raised by the supplier.

The purpose of the RC is to prevent VAT fraud being undertaken. The fraud involves suppliers charging VAT on sales invoices and then failing to pay over the VAT they have collected to HMRC.

The new arrangement applies to supplies previously having either 5% or 20% VAT charged. It does not apply to supplies which are charged at 0% VAT.

There are 3 checks which suppliers need to undertake to determine whether the supply is covered by the RC:

  • The customer needs to be VAT registered.
  • The supply needs to be covered by the CIS scheme at either 5% or 20% VAT rates.
  • The customer should not be an ‘end user’ of the service.

As regards the third point above, a contractor could be an end user, in circumstances where the supplier provides work on the contractors own premises

Contractors need to ensure that they do not accept invoices from subcontractors which incorrectly charge VAT.

Sales invoices raised under the RC system need to:

  • Show no VAT as being payable
  • Show as a note, either the amount of VAT which would be charged, or the rate of VAT which would have been charged, if the supply was not under the RC scheme.
  • Contain the following wording ‘ Reverse charge – customer to pay VAT to HMRC’

As an example, consider a £10,000 net supply under the CIS scheme at 20% VAT.

The relevant boxes on the VAT returns to consider are as follows:

Box 1  VAT on sales.

Box 4 VAT on purchases

Box 6 net value of sales

Box 7 net value of purchases.

If the supply was made in February 2021, the supplier would show £2,000 in box 1 and £10,000 in box 6. The customer would show £2,000 in box 4 and £10,000 in box 7.

For the same supply from 1 March 2021 onwards, the supplier would show £10,000 in box 6. The customer would show £2,000 in box 1, £2,000 in box 4 and £10,000 in box 7.

In the vast majority of cases the amounts shown in box 1 and box 4 for the customer would be the same. As a consequence no additional VAT would be payable by the customer to HMRC.

Box 1 and 4 would show different amounts in respect of this transaction, if there were non-business use elements on the supply or if the supply was connected with VAT exempt supplies.

The posting to the suppliers and customers VAT returns would be achieved by choosing the correct VAT code when inputting invoices on the accounting software.