From 1 October 2019, HMRC is introducing a VAT domestic reverse charge on supplies to building and construction companies of services that are within the scope of the Construction Industry Scheme (CIS). This will apply only to supplies of building and construction services where the customer is registered for both VAT and CIS.

These changes mean that sub-contractors will not charge VAT on supplies that are subject to the VAT domestic reverse charge. Instead, the customer (e.g. another sub-contractor or a main contractor) will include the VAT due in their VAT returns submitted to HMRC.

For example, if a main contractor purchases VAT standard rate supplies valued at £1,000 (excluding VAT) from a sub-contractor:

• The sub-contractor will not charge VAT on their invoice/application; and
• The main contractor will pay £1,000 to the sub-contractor, i.e. they will not pay VAT to the subcontractor; and
• The main contractor will include VAT payable to HMRC of £200 (i.e. £1,000 x 20% VAT) in their VAT return submitted to HMRC.

Where supplies within the scope of CIS are made to someone who has confirmed in writing that they, or a connected party, are the ‘end user’ of the building and construction services (i.e. the customer does not on-supply those services) domestic reverse charge will not apply and VAT will be charged in the normal way.

Which services are affected?

Services that will be affected by the introduction of the reverse charge include:

• general construction
• groundworks, renovations and maintenance services
• heating, ventilation and air conditioning
• cleaning services carried out in the course of construction
• painting and decorating of buildings and other structures.

Which services are not affected?

Supplies that are not affected by the introduction of the reverse charge include:

• zero rated services
• professional services provided by architects, surveyors and other consultants
• the installation of seating, blinds and shutters
• the installation of security systems, burglar alarms, CCTV and PA systems.

Practical Consequences

When considering your cash flow after 1 October 2019, you will need to take into account that customers who are sub-contractors or main contractors will no longer pay you VAT for supplies within the scope of CIS. If this will result in, you regularly making claims to HMRC for a net repayment of VAT. You could consider switching from quarterly to monthly VAT returns to obtain repayments earlier.

You will also need to ensure your accounting software complies with the changes. Any invoices subject to the reverse charge will need to include wording stating that the reverse charge applies.

For those clients that we undertake their VAT returns, we will of course ensure that our software is updated accordingly, however all clients need to ensure that they are invoicing their customers correctly.

Further information

For information on the introduction of the domestic reverse charge please see HMRC’s guidance note at:

• https://www.gov.uk/government/publications/vat-reverse-charge-for-building-and-construction-services-guidance-note/guidance-note

For guidance on supplies that are within the scope of CIS please see HMRC’s Booklet 340 at:

• https://www.gov.uk/government/publications/construction-industry-scheme-cis-340/construction-industry-scheme-a-guide-for-contractors-and-subcontractors-cis-340