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VAT: HMRC webinar on the reverse charge

30th Aug 2019
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Neil Warren shares the common questions answered by HMRC during a recent webinar concerning the reverse charge VAT rules for construction services.

2019 is proving to be a busy year for VAT, to say the least. The new reverse charge rules for construction services between builders (where the builder receiving the services makes an onward supply of those services to, say, a property owner) is the second major VAT challenge of 2019, following the introduction of MTD for VAT.

I recently listened to an impressive HMRC webinar about the new reverse charge rules that come into force on 1 October, which included some useful clarifications on some of the finer details posed by delegates during the session.

* * *

What work is subject to the reverse charge?

Any work that is captured by the Construction Industry Scheme (CIS) is relevant for reverse charge purposes. Appendix A of the CIS guide CIS340 gives a comprehensive list of building work that is captured.

Neil’s comment: In the webinar, HMRC focused on one particular example of work excluded from the reverse charge rules, namely work on plant and machinery. For example, attending a property to repair a radiator is not classed as building work.

* * *

Mixture of building work and non-building work

Shaun the subcontractor is a bit of an all-rounder. He undertakes two tasks for Bob the builder: repairing a radiator (not classed as building work) and painting window frames (definitely building work), and he issues one invoice for both jobs. In this situation, because some of the work is captured by the reverse charge rules (assuming Bob the builder makes an onward supply of the services, ie is not an end user), the reverse charge applies to the full value of the invoice.

Neil’s comment: This outcome might seem strange, but the HMRC presenter said it is to be done this way to avoid complications trying to split the invoice.

* * *

Employment agency businesses

Employment agencies often supply labour-only builders to other builders, so why are they excluded from the reverse charge?

The challenge here is to look at what is being supplied by the employment business. As the builders will be working under the control and instruction of the builder customer this is deemed to be a supply of staff rather than building services. This is different to the situation where suppliers get on with jobs under their own banner, eg an instruction to rewire an office or decorate a room.

* * *

Gross and net payments

Does the reverse charge apply to gross payments made under the CIS as well as to net payments (ie where income tax is deducted at source)?

The reverse charge applies to both. It is the nature of the work that counts and whether the builder customer is both VAT and CIS registered, not the payment arrangements.

* * *

Period covering 1 October

What is the situation for work that spans the 1 October introduction date?  

You need to look at the tax point date. In most cases, this will be the invoice or payment date, whichever is earlier. If this is on 1 October 2019 or later, the reverse charge will apply, subject to the other rules.

Example

Subcontractor Steve receives an advance payment from Contractor Clive on 20 September 2019 for work to be carried out by Steve in October. Steve will raise an invoice once the work has been completed, on say 31 October. The tax point is the earlier payment date in September, so Steve should charge VAT to Clive and account for output tax in the normal way.

Final tip

An important point emphasised in the webinar is that all builders affected by the new rules must consider the accounting mechanics in advance of 1 October.

  • Will your accounting software deal with the invoicing needs of suppliers to include a comment about the reverse charge applying and the amount of VAT to be declared?
  • Will the VAT amounts find their way to the relevant boxes on the return without manual intervention?

Comments below please. 

Replies (27)

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By Ian McTernan CTA
02nd Sep 2019 11:33

Just another needless complication for people who already struggle to understand the tax system.

Thanks (7)
Replying to Ian McTernan CTA:
By SteLacca
03rd Sep 2019 09:21

Ian McTernan CTA wrote:

Just another needless complication for people who already struggle to understand the tax system.

What, you mean HMRC, for example?

Thanks (3)
Replying to SteLacca:
Morph
By kevinringer
03rd Sep 2019 10:04

Definitely HMRC. I can see businesses phoning VAT Helpline for guidance and being told they don't deal with CIS so the business phones the CIS Helpline and being told they don't deal with VAT. Yet the business is expected to deal with both and much more too.

Thanks (1)
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By Busypractitioner
02nd Sep 2019 12:13

I agree with Ian McT. HMRC really haven't grasped the reality of life have they. "Does the builders software cope with the new requirements?". 99.9% of contractors in the CIS scheme don't have software and its probably not much different those VAT registered and in the CIS regime.
Reverse charge on imports was required to enable the Input and Output totals to be correctly reported to the EU. Haven't they heard that Brexit is looming? Lets start forcing an incomprehensible system of accounting invented by the EU on the UK small builder just when Brexit opens up the possibility of simplifying things - very forward thinking!

Thanks (4)
7om
By Tom 7000
02nd Sep 2019 12:23

How does Flat rate vat work with this?

a. Ignore the CIS invoices as exempt or

b. Suffer the flat rate on the net amount?

We have a difference of opinion in the office....

Thanks (0)
Replying to Tom 7000:
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By legerman
02nd Sep 2019 13:46

Tom 7000 wrote:

How does Flat rate vat work with this?

a. Ignore the CIS invoices as exempt or

b. Suffer the flat rate on the net amount?

We have a difference of opinion in the office....

B. It won't be advantageous to remain on the flat rate scheme if CIS. The other thing to watch for is if there is a mix of labour and materials on the invoice the whole invoice is subject to reverse charge VAT.

https://www.taxation.co.uk/articles/2019-01-15-339100-reverse-charge-leg...

Thanks (1)
Replying to legerman:
7om
By Tom 7000
02nd Sep 2019 14:41

Remember when you were doing accounts exams and the lecturer said.... Read the question and answer it....

I appreciate your comments but is it a or b?
Because I can't access that taxation article

And I might have a client on FRS who only issues one CIS invoice for 200 and I want to know what to do with it :)

Thanks (0)
Replying to Tom 7000:
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By jimeth
03rd Sep 2019 12:00

On reverse charge sales you no longer receive VAT from your customer but the revenue is still included in your flat rate calculation. So you effectively end up paying VAT to HMRC that you have not received from your customer.

Thanks (0)
Replying to Tom 7000:
7om
By Tom 7000
03rd Sep 2019 12:19

Ok, I found out and it works like this

You are about to raise your sales invoice 1000+200 vat. There's no vat as its reverse charge . You send them an invoice for £1000 only and the reverse charge statement on the invoice. When calculating the FRS vat to pay over you completely ignore this invoice.

When you are on FRS and you get an invoice from a subbie, then theres no vat on it. lets say that's £500 no vat but it says reverse charge applies. Then you add £100 to your sales/ output tax as the reverse charge applies but YOU DO NOT add 100 onto input/ purchase vat

So overall on purchases its the same as before, on sales you are down a bit as there is no flat rate gain you used to get.

Thanks (0)
Replying to Tom 7000:
avatar
By legerman
03rd Sep 2019 15:43

Tom 7000 wrote:

Remember when you were doing accounts exams and the lecturer said.... Read the question and answer it....

I appreciate your comments but is it a or b?
Because I can't access that taxation article

I did give you the answer, it was B.

Tom 7000 wrote:

Ok, I found out and it works like this

You are about to raise your sales invoice 1000+200 vat. There's no vat as its reverse charge . You send them an invoice for £1000 only and the reverse charge statement on the invoice. When calculating the FRS vat to pay over you completely ignore this invoice.

Sorry, but you have that wrong. The invoice for £1000 should be included in your sales as part of the VAT inclusive amount. You will then have to pay your flat rate VAT percentage on this amount, so you will be worse off if remaining on the flat rate scheme.

https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and...

Thanks (1)
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By maxaca
02nd Sep 2019 14:19

The other thread below complicates by involving different EU member states but if they are both UK based and the sub-contractor is not VAT registered, should the main contractor use the reverse charge or not?

https://www.accountingweb.co.uk/any-answers/reverse-charge-when-supplier...

Thanks (0)
Replying to maxaca:
7om
By Tom 7000
03rd Sep 2019 12:23

If your subbies not vat registered, he wont be writing on the bottom of his invoice reverse charge vat applies.... so it wont :)

Thanks (0)
Morph
By kevinringer
02nd Sep 2019 14:23

Neil, you say if the invoice has a mixture of building work and non-building work the reverse charge applies to the entire invoice. I have watched the presentation. At 33:40 an example invoice is shown that has reverse charge and non-reverse charge items. Why does HMRC's example include both whereas your statement says the reverse charge applies to the entire invoice?

Thanks (0)
Replying to kevinringer:
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By EASTIE
02nd Sep 2019 16:19

My understanding is that the Reverse Charge applies to the whole of the Mixed Supply, including repairs of building service components. Now somewhat concerned as to the true position!

Thanks (0)
Morph
By kevinringer
02nd Sep 2019 14:44

CIS subcontractors do not need to consider the CIS implications of their supplies: it is the contractor who must consider the implications and identify what work falls within CIS. However for the VAT reverse charge it is the subcontractor who must identify whether the work is CIS or not: something subcontractors were not previously required to do. So this will be completely new to subcontractors. Subcontractors won't have time to wade through CIS340 so they're going to phone for help instead. HMRC's Reverse Charge guidance doesn't say where to go for further help. Should subcontractors phone HMRC VAT Helpline or HMRC CIS Helpline?

Thanks (0)
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By KenKLM
02nd Sep 2019 16:09

A necessary evil given the amount of VAT being lost but even more burden on agents to sort out . It is comical that comments such as "the builder will need to consider their accounting options" and "will VAT amounts find their way to the relevant boxes on the return without manual intervention?" - most subcontract builders rely on their accountants . For us it means amending spreadsheets again to cope with a change and having to deal with a split period for quarters that straddle the 1st October . What next ?

Thanks (1)
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By GHarr497688
02nd Sep 2019 21:03

HMRC will just get a rebellion on their hands and as with MTD they won't know. Very bad timing too and not enough education either. Very bad !

Thanks (1)
Morph
By kevinringer
03rd Sep 2019 10:54

What happens if a subcontractor fails to operate the reverse charge and raises a normal VAT invoice? Should the contractor pay the invoice in full and account for the VAT as normal or should the contractor not pay the VAT and instead account for it using the reverse charge process?

Thanks (0)
Replying to kevinringer:
7om
By Tom 7000
03rd Sep 2019 12:14

Pay net and tell him to use us as accountants as his existing accountants pants.
HMRC will disallow the vat and you are up the creek with a fine

Thanks (0)
Morph
By kevinringer
03rd Sep 2019 10:56

What happens if a subcontractor issues a reverse charge invoice when they should have done eg because the subcontractor didn't realise the contractor was an end user? Should the contractor deal with reverse charge invoice or should the contractor get a non-reverse charge invoice from the subcontractor?

Thanks (0)
By Nick Graves
03rd Sep 2019 11:32

Well, I've just totally failed to explain it to a sharp-minded lady in her 70s.

I dunno if she should give up or I should. Both, probably.

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By DenholmHay
03rd Sep 2019 12:01

Our concern is the reporting -

"Within 30 days, you must tell HMRC the date on which you first make a reverse charge sale. You must also give HMRC the name and telephone number of a contact. If you then stop making such supplies, within 30 days, you must tell HMRC the date that you stopped. But if later, you again make reverse charge sales, within 30 days you must tell HMRC the date you restarted, and again give contact details. Penalties apply"

Thanks (0)
Replying to DenholmHay:
7om
By Tom 7000
03rd Sep 2019 12:21

I bet you a shilling that doesn't apply to CIS :)

Thanks (0)
Replying to DenholmHay:
Morph
By kevinringer
03rd Sep 2019 13:27

I wasn't even aware of the reporting. Crazy. None of my subbies will comply with this.

Thanks (0)
Replying to DenholmHay:
Morph
By kevinringer
03rd Sep 2019 13:32

I've checked through https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and.... Where does it say that HMRC has to be notified?

Thanks (0)
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By Melissa123
06th Sep 2019 16:10

HMRC have postponed it until next year!!

Thanks (0)
Replying to Melissa123:
Morph
By kevinringer
16th Sep 2019 13:42

Good news that it has been postponed but that's not the solution: it needs to be changed because it is too complex. I question the need for it at all because HMRC already knows who gets paid what under CIS and can double check the VAT if they want.

Thanks (0)