As of 1 March 2021, those working in the UK’s construction industry might have to handle and pay VAT in a different way following the introduction of the new VAT reverse charge system.
What is the VAT domestic reverse charge for construction services?
The VAT domestic reverse charge for building and construction services, to give it its full title, is a change in how VAT is handled for certain kinds of construction services in the UK, along with the building and construction materials used directly in those services (although it doesn’t apply to building and construction materials supplied separately and independently of any construction services).
The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors.
The scheme means that those supplying construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT (that is, it will be considered input tax for them, as if they’ve made the supply to themselves).
In even simpler terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.
The payment received will be for the cost of the work done (plus materials used), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice.