VAT: What is Domestic Reverse Charge?
Subcontractors who previously issued VAT invoices for their services will now settle accounts with their contractor without charging them VAT.
By settling for their services on a net basis, they will not be able to "disappear" from HMRC's sight by retaining the VAT for themselves.
New law concerning construction workers
The new VAT accounting rules have been published in the official gazette SI VAT 2019 s.55A. The regulation was supposed to come into force on 1 October 2019, but it was postponed twice: first, due to HMRC's poorly disseminated VAT calculation rules, and second (after 1 October 2020), due to the Covid-19 pandemic. Ultimately, the new rules will apply from 1 March 2021.
Who must account for VAT under the Domestic Reverse Charge rules?
If you answer "yes" to the first four of the 5 questions below, and "no" to the last one, you must account for VAT using the Domestic Reverse Charge:
- Are you registered for CIS? If you are a subcontractor, you are probably (or should be) registered for CIS. However, if you do not have a contractor who commissions work from you, you will account for VAT under normal rules;
- Is your client VAT registered? Each time, you must find out if the company you are invoicing is VAT registered. You can check this via this link;
- Should the work be accounted for under the CIS scheme? When working for a construction contractor, most work will be accounted for under the CIS scheme – electricians, carpenters, and even post-construction cleaning companies. HMRC precisely describes who is obliged to register for CIS;
- Is the service provided subject to VAT? Construction services can have three different VAT rates: 0% (for example, the construction of new residential buildings), 5% (for example, services related to Energy saving), 20% for standard construction services, which are neither at 5% nor 0%. VAT regulations state that if services are not specifically listed in legal provisions as being subject to 0% VAT or 5% VAT, then they are generally subject to 20% VAT. Therefore, if your services are subject to 0% VAT, the Domestic Reverse Charge will not apply to you;
- Is your client an "end user"? “End User” is the key term here. If you receive an order from Ms. Barbara, who wants to add an extension to her apartment, she is the “end user”. However, if there is a larger contractor between you and your company who then hands over the building directly to the client, then your client is not the end user.
HMRC has published a helpful graphic to help you determine who is affected by Domestic Reverse Charge.
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According to HMRC calculations, the state lost up to £120 million due to abuses by construction companies. New VAT accounting regulations for businesses operating in the construction sector, effective March 1, 2021, aim to curb this practice.
