Tag Archives: Construction Industry Scheme

Construction industry and the VAT Reverse Charge

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After a couple of false starts, HMRC’s VAT reverse charge for building and construction services is finally due to come into force from 1 March 2021.

This is a hot topic for property and construction businesses right now and an additional administrative burden in already tricky times.

Below is a summary of the basics.

Who is affected by the changes to the Reverse Charge?

From 1 March 2021, all UK VAT registered individuals or businesses that receive or supply standard or reduced rate services reported within the Construction Industry Scheme need to consider the new domestic VAT reverse charge scheme.

Suppliers

Suppliers must use the reverse charge from 1 March 2021 if they are UK VAT registered and:
– the customer is UK VAT registered.
– payment for the supply is reported within the Construction Industry Scheme (CIS).
– the services are standard or reduced rated.
– they are not an employment business supplying either staff or workers, or both.
– their customer has not given written confirmation that they are an end user or intermediary supplier.

What should a supplier do now?

1. Check their customer has a valid VAT number.
2. Check their customer’s CIS registration.
3. Review their contracts and if the reverse charge will apply, tell their customers.
4. Ask their customer to confirm if they are an end user or intermediary supplier (see below).
5. Work out how to record the reverse charge in their accounts.
If the customer confirms they are an end user, the reverse charge does not apply. Invoices should be raised with no change and VAT applied and accounted for as before.

I am a supplier and have confirmed the reverse charge applies. What do I do from 1 March?

– Sales invoices should be raised with no VAT (although still a taxable supply).
– Ensure the invoices state that the reverse charge applies.
– Report the sales in the Turnover box only on your VAT Returns.
– Customers will no longer pay you the VAT element. This could have a considerable cashflow impact. You should consider moving to monthly VAT returns to aid the cashflow burden.

What do the changes to the Reverse Charge mean for buyers?

Buyers must use the reverse charge from 1 March 2021 if they are UK VAT registered and:
– Payment for the supply is reported within the Construction Industry Scheme (CIS).
– The supply is either standard or reduced rated.
– They are not hiring either staff or workers, or both.
– They are not an end user or intermediary user (see below).

What should a buyer do now?

1. Check their supplier has a valid VAT number.
2. Determine whether or not they are an end user or intermediary user. If they are an end user or intermediary user then they need to inform their supplier.
3. Work out how to record the reverse charge in their accounts.
If the buyer is an end user or intermediary user, then the reverse charge does not apply. Invoices should be received with no change and VAT applied and accounted for as before.

I am a buyer and have confirmed the reverse charge applies. What do I do from 1 March?

– From 1 March 2021, ensure that invoices received from suppliers are correct and if within the reverse charge scheme, are raised with no VAT.
– Record the reverse charge on your VAT return. This means:
o Calculate what the VAT input tax would be and put this is the purchase input tax box.
o Enter the same amount in the output tax box. This cancels with the above so has no overall effect on the VAT being paid/claimed.
o Include the purchases amount (which excludes any VAT) in the purchases box.

Am I an “end user”?

Consumers and final customers are called “end users”. For the purposes of the Construction Industry and the VAT Reverse Charge, this will mean businesses, or groups of businesses, that are UK VAT and CIS registered but do not make onward supplies of the building and construction services provided to them.
In practical terms, for property and construction companies, this will usually be the company that owns or leases the property where the works are taking place.
The reverse charge does not apply to end users (as long as the end user informs their supplier in writing that they are an end user)

What about a Corporate Group scenario?

“Intermediary suppliers” are UK VAT and CIS registered businesses that are connected or linked to end users. To be connected or linked to an end user, intermediary suppliers must either:
– Have a relevant interest in the same land where construction works are taking place, or
– Be part of the same Corporate Group or undertaking.

The reverse charge does not apply to supplies to intermediary suppliers where the intermediary supplier notifies their supplier or building contractor in writing that they are intermediary suppliers. Intermediary suppliers can refer to themselves as end users.

The most common question at the moment is what happens where a Group company (ConstructCo Ltd) carries out the construction work and charges to a fellow Group subsidiary company that owns the property (PropCo Ltd).

In this scenario, ConstructCo is an “intermediary supplier” and Prop Co Ltd is an “end user”.
The reverse charge will not apply on any transactions between ConstructCo Ltd and PropCo Ltd and will also not apply on any transactions between ConstructCo Ltd and third-party subcontractors. In other words, there is no change from existing procedures.

Changes to the Construction Industry Scheme (CIS) 2020

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Changes to the Construction Industry Scheme (CIS) are directed towards tacking abuse, and take effect from 6 April 2021. They include:

– Cost of materials – there will be more specific rules about what type of expenditure on materials can be deducted before calculating tax. This is to tackle inflated materials costs leading to lower deductions of tax.

– Deemed contractors – aimed at businesses outside the construction industry, but whom might incur substantial construction costs (over £3m). This introduces a requirement to review expenditure on a 12 month rolling basis, and register rather than at the end of each accounting year.

– Increased penalties for supplying false information to achieve Gross Payment Status.

– HMRC will gain the power to amend CIS deductions claimed by sub-contractors on monthly PAYE returns and reverse CIS claims accordingly. This could lead to enforcement proceedings, interest and penalties at much earlier stages in the cycle.

My take on this is that with an increased compliance burden, the value of Gross Payment Certificates are heightened, and as such, construction businesses must ensure that their HMRC compliance history remains unblemished in spite of current pressures on cash..

CIS for contractors and sub-contractors

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The objective behind CIS

The current iteration of the Construction Industry Scheme (CIS) came into effect on 6 April 2007 but it has been refined in the years since its introduction.   All permutations have been created to try and overcome the belief that many payments in the construction industry were not reported for tax purposes.  CIS prevents this by operating a system which is not dissimilar to PAYE.  The payer has an obligation to consider the status of the party to whom payments are made and, in certain circumstances, withhold tax from the payments.  As the operation is similar to that of PAYE, it is the PAYE section of HMRC which administers CIS.

What is covered by CIS?

CIS applies to the labour element of a construction contract.  Construction contracts are defined in legislation and go beyond simply building structures.  Examples of construction operations include painting and decorating and preparative work such as site clearance and scaffolding.

Who is affected by CIS?

The legislation specifically excludes some operations from CIS.  Examples include the professional work of architects and surveyors, and security installation.  However, if any of those parties take part in the management of construction work then they are within CIS.

For CIS to apply,  operations must take place in the UK, including the UK territorial waters, and can include marine construction.  The residence of the parties is not relevant; it is the location of the works which are important. This can be overlooked by non-UK businesses seeking contracts in the UK.

Managing CIS

CIS applies to the labour component of construction.  If there is one contract that covers all construction operations then CIS considerations will be relevant to the entire contract.  This applies even if separate invoices are raised for separate parts of the contract.  It may be necessary to split the project into separate contracts so that there is a single contract for labour and CIS would only apply to that contract.

CIS responsibilities for contractors

CIS applies whenever there is a contractor and sub-contractor relationship.  The legislation defines both and gives an extensive list of those persons who are treated as contractors for its operation.  If CIS is relevant, then the contractor has an obligation to verify the status of the sub-contractor and apply the relevant regulations to payments made to them.  It is the impact of payments which is particularly important to understand.  This is due to the cashflow impact for the sub-contractor.

If the sub-contractor is not registered with CIS then the contractor must deduct tax at 30% from payments to the sub-contractor.  If the sub-contractor is registered then the deductions falls to 20% unless the sub-contractor is registered as a gross status party in which case no deduction is required.  The deduction is against the VAT exclusive payment and does not apply to the cost of materials of the sub-contractor.  If the sub-contractor does not confirm their cost of materials then the contractor should make a reasonable estimate.

There are regulations which define how the contractor must verify the status of the sub-contractor and the frequency of CIS Returns.  All of these administrative tasks must be done online.

If the sub-contractor is a company then tax deducted from payments received by it can be offset against its own PAYE and  National Insurance Contributions, deductions under CIS from payments made to its own sub-contractors and Corporation Tax on its profits.  If the sub-contractor is not a company then tax deducted is offset against its Income Tax liability and National Insurance Contributions.  The sub-contractor who is not a company will therefore claim relief for deductions at a later time than a corporate sub-contractor.

Registering for Gross Status

There are obvious advantages to registering for gross status and there are conditions which must be satisfied before gross status can be attained.  These include the method of operating in the UK, turnover thresholds, group structure and demonstrating a good compliance history with HMRC.  If the compliance history is damaged during construction operations then HMRC can revoke gross status which may have a catastrophic impact on cashflow.  Maintaining a good compliance history with HMRC is therefore paramount.

How we can help

We have considerable experience of CIS matters including split contracts, definitions of contractors and sub-contractors, the practical impact of professionals providing project management services and preventing loss of gross status.  All of these ensure that the cashflow impact of CIS is minimised.