Understanding the CIS VAT Domestic Reverse Charge

PostedFebruary 8, 2024

UpdatedFebruary 8, 2024

ByWill Finch

The Construction Industry Scheme (CIS) VAT Domestic Reverse Charge is a modification of the standard VAT system in the construction sector. This guide delves into its intricacies, outlining how it operates, who is affected, and the procedures for implementing it in business transactions.

What is the CIS VAT Domestic Reverse Charge?

The CIS VAT Domestic Reverse Charge is a modification of the standard VAT system, specifically designed for transactions within the construction industry. Under this scheme, the buyer or contractor, rather than the supplier or subcontractor, takes responsibility for VAT accounting. This means the buyer accounts for VAT on their VAT return as both output tax (sales VAT) and input tax (purchase VAT).

Scope of the Domestic Reverse Charge

The reverse charge applies to businesses that provide or receive construction and building services reported within the Construction Industry Scheme (CIS) and subject to VAT at the standard or reduced rate. Both the supplier and the customer need to be VAT registered in the UK for the charge to apply.

Exceptions to the Domestic Reverse Charge

There are specific circumstances where the reverse charge does not apply:

When services are supplied to an end user or “intermediary.”
When the supply involves construction workers provided by an employment business rather than subcontracted labour.

Understanding End Users and Intermediaries

End Users

End users are consumers and final customers. They include businesses or groups of businesses that are registered for VAT and the Construction Industry Scheme, but do not make onward supplies of the building and construction services supplied to them. The reverse charge does apply to supplies to end users.

Intermediaries

Intermediary suppliers are businesses registered for VAT and the Construction Industry Scheme, connected or linked to end users. If intermediary suppliers purchase construction services and supply them to a connected or linked end user without making significant alterations, the intermediary and subsequent purchasers are treated as end users, and the reverse charge does not apply.

Supplying Construction Workers or Labour-Only Construction Services

Construction Workers

If a business is receiving workers, it is responsible for overseeing the completion of the work carried out. In this case, the reverse charge does not apply.

Labour-Only Construction Services

When a business is supplying labour, it is responsible for overseeing the completion of the work carried out by the workers. This scenario is subject to the reverse charge.

Services Covered by the Domestic Reverse Charge

The reverse charge applies to most services reported under the Construction Industry Scheme and only applies to standard or reduced-rate services. Services that the reverse charge applies to include:

Demolition, construction, or repairs to structures or land.
Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply, or fire protection systems.
Cleaning or decorating a building during construction.

The GOV.UK website provides a comprehensive list of included and excluded services.

Services Exempt from the Domestic Reverse Charge

The reverse charge does not apply to zero-rated construction services or services not covered under the Construction Industry Scheme. Examples of excluded services include:

The work of architects, surveyors, landscapers, and decorators.
Installing seating, blinds and shutters.
Installing security systems, including burglar alarms, closed circuit television, and public address systems.

The GOV.UK website provides a comprehensive list of included and excluded services.

Application of the Domestic Reverse Charge to Materials

The reverse charge is applicable to building and construction services and any construction materials used directly in providing those services.

Invoicing for Reverse Charge Services

When issuing an invoice for reverse charge construction services, businesses must:

Show all the information required on a VAT invoice.
Note on the invoice that the domestic reverse charge applies, and that the customer is required to account for the VAT.
Clearly state the VAT amount due under the reverse charge, or the VAT rate if the VAT amount cannot be shown. However, the VAT should not be included in the amount charged to the customer.

The VAT Regulations 1995 require invoices for services subject to the reverse charge to include the reference ‘reverse charge.’ For instance, ‘Reverse charge: Customer to pay the VAT to HMRC.’

Accounting for the Domestic Reverse Charge on Your VAT Return

If you are a subcontractor supplying construction services subject to the reverse charge, these will only need to be included in box 6 of your VAT return (value of sales excluding VAT). As it’s the buyer’s responsibility to account for the VAT, there is nothing to enter in box 1 (VAT due on sales) of your VAT return.

If you purchase domestic reverse charge services, you will need to account for the VAT in box 1 (VAT due on sales) of your VAT return but will not enter anything in box 6 (value of sales excluding VAT).

To reclaim the VAT, enter the VAT amount on your reverse charge purchases in box 4 (VAT reclaimed on purchases) of your VAT return. The VAT-exclusive value is included in box 7 (value of purchases excluding VAT), as you would for standard-rated purchases.

How Lynx Simplifies Your Invoicing and Account for The CIS VAT Domestic Reverse Charge

Luckily, Lynx has some built in features that enable you to track invoice VAT, and our integrations with major accounting applications including Quickbooks and Xero allow for seamless VAT returns.

Lynx allows for reverse charge VAT codes to be created right from the point of order, so when an invoice is raised that needs to be reverse charge, the appropriate text (which you can amend to suit your needs) is automatically included in the invoice document produced and the amount due to be paid by the customer direct to you is adjusted accordingly. You can even set up a customer so that their orders always default to reverse charge, which is useful if you regularly work with another construction industry firm.

Conclusion

The CIS VAT Domestic Reverse Charge establishes a new VAT accounting system for the construction industry. Understanding its application and exceptions is crucial for businesses in this sector. Given the complex nature of VAT regulations, always seek advice from VAT advisory services or financial professionals to ensure compliance.

References and Additional Resources

For more details on the CIS VAT Domestic Reverse Charge, refer to the following resources:

This article merely provides a general understanding of the CIS VAT Domestic Reverse Charge. For personalised advice, consult a VAT advisor or financial expert.