New domestic reverse charge rules for builders came into effect on 1 March 2021, meaning that a supplier of construction services no longer charges 5% or 20% VAT on his sales invoices if his customer meets three conditions:
- – registered for VAT;
- – registered for the Construction Industry Scheme (CIS); and
- – sells on the services in question to his own customer.
The customer will declare output tax in box 1 of his return, claiming the same amount as input tax in box 4. The invoice raised by the supplier builder must show the amount of VAT to be declared by the customer, or at least the rate of VAT.
Here’s a list of the four most popular queries on the new domestic reverse charge rules for builders since 1 March 2021:
Are supplies of building materials subject to the reverse charge?
A builder buying materials from a construction company was rightly confused that he was not being charged VAT on his purchase invoice and being told to account for the reverse charge. The reverse charge applies to materials supplied by a builder as part of his work but not materials bought on a stand-alone basis without services.
The error was eventually corrected by the supplier, who seemed to have decided that all supplies to a CIS/VAT registered customer fell within the reverse charge system, irrespective of whether they involved building services.
Supplier quotes 20% VAT but the rate should be 5%
If a subcontractor invoices a contractor for work on, say, converting an office block into flats, this work is subject to 5% VAT.
What happens if a subcontractor issues an invoice to the contractor, correctly saying the reverse charge applies to the work but at a rate of 20% rather than 5% VAT?
Is this error important when the Box 1 and Box 4 entries on the contractor’s VAT return will cancel each other out anyway?
The answer is ‘yes’ – the input tax entry of the reverse charge goes through the same process as the VAT on any purchase invoice. So, if the VAT rate should be 5% rather than 20%, that is the VAT claimed in Box 4.
Would HMRC also accept that 5% VAT can be declared in Box 1, even though the supplier has quoted 20% VAT on his sales invoice?
The answer will probably be ‘no’, so the supplier is encouraged to raise an invoice that correctly shows the 5% rate.
What happens if a customer is waiting for his new VAT number from HMRC?
A builder did some work for a contractor, which was subject to the reverse charge. The contractor had applied for a VAT number from HMRC, which had not yet been issued. In such cases, the reverse charge can still be applied to the sales invoice because it applies if the customer is ‘registered or liable to be registered for UK VAT’ – as confirmed by VAT Notice 735, para 7.1.
However, the sensible strategy is to ask the customer for an extra 20% payment, to be held as a refundable deposit that will be returned once proof of the customer’s VAT number is given, showing that the registration period was covered by the invoice date. This approach is supported by HMRC’s advice at para 9.3.2 of VAT notice 735.
Retention payments – what is the tax point?
An accountant wrongly thought that if the original job subject to a retention payment was invoiced before 1 March 2021, the subsequent invoice for a release of the retention money would be excluded from the reverse charge rules.
This is incorrect: normal tax point rules apply to the retention, ie, the relevant date is the invoice or payment date for the retention, whichever comes first. If this date is on or after 1 March 2021, it comes within the reverse charge system.
New domestic reverse charge rules – March 2021
Overall, the questions I have received about the new rules have been limited, which is good news. Hopefully, the system is working well.
The other big challenge with the new procedures is the cashflow challenges for builders that no longer collect VAT up to four months before submitting a VAT return. A few bank overdraft extensions have been necessary, I suspect.
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