As of the 1st of March 2021, the Domestic Reverse Charge VAT rate will come into effect for businesses in the construction industry who are VAT and CIS (Construction Industry Scheme) registered.

There are two main impacts:

Subcontractors

If you are providing construction industry services (as defined by HMRC’s guide on CIS work) to a CIS and VAT registered company, then you must from the 1st of March 2021, make two key changes.

1. You must not charge or collect VAT on labour or materials charged, instead you should clearly state you are using the domestic reverse charge VAT rate. In addition, your invoice must make it clear that the company you are billing, must account for VAT on the invoice that is sent to the end user (the original customer who has commissioned the work).
2. If you use the cash basis for your VAT returns, you must now switch across to a non cash basis for your VAT returns. This means in some instances, you will pay VAT on your invoices before you receive payment for them. 

There will be no changes to how CIS is accounted for, so you must continue to invoice for CIS as per usual.

Construction Companies using subcontractors

You must ensure you are not collecting VAT from your VAT registered subcontractors however you must still charge VAT to your customer who has commissioned you to carry out the work.

There are notable exceptions to the above, including VAT registered subcontractors who perform tasks such as boiler installations, this particular work is to be charged at standard rated VAT (20%).

All construction industry businesses should read the HMRC VAT notice on the new changes, which can be found here.

Has your accountant explained how the changes affect you?