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CIS VAT Reverse Charge Scheme
CIS VAT Reverse Charge Scheme

 

A new domestic reverse charge was introduced on the 1st of March 2021.

This change in VAT rules could affect the cash flow of 150,000 small and medium businesses in the UK construction sector, many of whom are covered by the Construction Industry Scheme (CIS).

This blog post will detail the specifics of this change and how it could affect your business.

 

 

Who does this apply to?

 

Individuals or businesses registered for VAT in the UK, which sell to other VAT-registered businesses.

Entities that provide services specified under CIS. These include the construction, renovation, and demolition of structures; painting and decorating, as well as services such as heating, ventilation and air conditioning.

The arrangements don’t apply to businesses providing other support services such as surveying, architecture and consultancy; machinery, drilling or extraction, and the installation of security systems.

HMRC covers a full breakdown of services are that are included and exempt under CIS

 

 

What has changed?

 

In a bid to combat fraud, VAT cash no longer flows between VAT registered businesses involved in the construction industry.

As well as suppliers of specified services, reported under CIS, the changes also apply to goods that are supplied alongside these services.

 

 

How does it work?

 

Suppliers no longer need to charge or receive VAT from main contractor customers.

Instead, main contractors effectively charge themselves VAT on supply services, and pay the VAT sums that would have been paid to the subcontractor direct to HMRC in their VAT returns.

For impacted suppliers, subcontractors need to issue domestic reverse charge VAT invoices to main contractors, which must include wording that reverse VAT rules apply and that the customer must account for the VAT.

This requirement applies through the supply chain until main contractors sell to end users (clients) who do not sell on services.

 

 

Effect on Cash Flow

 

Subcontractor

Pre 1 March 2021

Post 1 March 2021

Invoice for services £1,000

Invoice for services £1,000

VAT £ 200

VAT Reverse charge applies -

Total Received £1,200

Total Received £1,000

 

As this example demonstrates, the subcontractor is affected by the fact that their business will no longer receive the VAT. This will effectively put subcontractors in a refund position for VAT with output tax being paid at source.

Here, a suitable arrangement would be to apply for monthly VAT returns to help with cashflow and to ensure that your VAT position is up to date. This will mean that you avoid waiting 3 months to reclaim your input tax. Please contact us on 01254 589799 and a member of our team will be more then happy to discuss and help strategize.

 

Contractor

Pre 1 March 2021

Post 1 March 2021

Invoice for services £1,000

Invoice for services £1,000

VAT £ 200

VAT Reverse charge applies -

Total Paid £1,200

Total Paid £1,000

 

The contractor must account for the reverse charge on its VAT return. This is done by including it as a sale on Box 1 of the VAT return as well as the input recovery amount in Box 4.

This change is cashflow positive for the contractor as they will affectively pass on the net cost to the subcontractor and then accounts for the VAT on its return.

 

Contact Gow & Partners

 

If you need any help implimenting invoiced under the new reverse charge rules, or assistance with cashflow/VAT planning, then get in contact with our team! Simply call 01254 589799 today! Alternatively, you can fill in a contact form, or send us an email at info@gowandpartners.co.uk.