Are the rules changing as to how I should invoice my customers?

Gemma Newstead
Gemma Newstead

A major change to the way VAT is collected in the building and construction industry is on the horizon

Question: I am a VAT registered subcontractor within the construction industry and I have been told that the rules are changing as to how I should invoice my customers. Please can you explain this further?

Answer: That’s right, HMRC are introducing a major change to the way VAT is collected in the building and construction industry. This is called the domestic reverse charge, or more simply ‘the reverse charge’. It comes into effect in October 2020 and means that your customers may have to pay the VAT due to HMRC instead of paying you.

These changes are being implemented to help tackle ‘missing trader fraud’ whereby VAT is charged but not paid over to H M Revenue & Customs.

This change will only apply to customers who are individuals or businesses registered for VAT in the UK. Furthermore, the reverse charge does not apply to consumers or final customers of building and construction services, known as end users.

As a subcontractor, you will need to confirm with your customer if they are an end user or an intermediary supplier and keep a record of their answer. If they are an end user, you should charge VAT in the normal way. If they are not an end user, you will need to apply the reverse charge.

However, before you apply the reverse charge, you will need to check that your customer is VAT registered and a contractor within the CIS scheme. You can check that your customer’s VAT number is valid and belongs to them on the European Commission website. You should also obtain evidence that your customer is a registered contractor. For existing customers you may already have evidence of this, such as a deduction certificate; for new customers you can ask them to provide details of their registration as a contractor for CIS purposes or a copy of their CIS verification of you.

Once you have established that a supply is subject to the domestic reverse charge, you must make a note on your invoice that the domestic reverse charge applies and that the customer is required to account for the VAT. You should also clearly state how much VAT is due under the reverse charge or alternatively the rate of VAT if the VAT amount cannot be shown for any reason. It is important to note that the amount charged to your customer should not include VAT.

The contractor that you are supplying will need to treat your supply differently on their VAT return under these new rules. If they use any subcontractors and receive an invoice under the new rules then they will need to take advice on how to deal with this.

As mentioned, this is a major change to the way that VAT is collected within the building and construction industry and if you would like any further guidance on this matter, please get in touch.

If you would like to arrange a free consultation to discuss your tax position or require any other assistance, please contact Gemma Newstead on 01424 720222 or email her at GemmaN@ashdownhurrey.co.uk.