The CIS VAT Reverse Charge – How will it impact your Business?

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  Posted by: electime      13th July 2020

by Henry Ejdelbaum AIMS Accountants for Business

From March 2021 the Construction Industry Scheme (CIS) VAT domestic reverse charge comes into force. It was due to come in October 2019, but was delayed due to first Brexit, then Covid-19. But what is it and why is it relevant for electrical contractors?

What is the CIS VAT Reverse Charge?

The best way to describe it and its effects is through an example.

Let’s say that you are a VAT registered electrical contractor, doing work on a new build development, and have been hired by the main contractor to carry out work worth £10,000.

Currently, you would provide an invoice for the work for a total of £12,000, comprising £10,000 for your work and £2,000 for the VAT. This will get paid to you directly and you will, at the end of the quarter pass the VAT payment on to HMRC.

However, under the new scheme, you would simply invoice for £10,000, as it is the customer who now accounts for the supplier’s output VAT.

So, what’s the difference?

The difference is twofold.

Firstly, it means that electrical contractors might need to be conscious about their books and how to invoice for their services. There are certain requirements which will need to be included in any invoice, and whilst we won’t go into full details here, it is important that these are understood, so you don’t fall foul of the new requirements.

Secondly, the new ruling might have an impact on your cashflow. Under the example the £2,000 VAT payment was originally received and is only due to be paid to HMRC at a later date. This means that you had access to additional cashflow, which might have enabled you to pay suppliers, wages, or other costs until your next income was received. Now, that additional payment isn’t received at all. This will have no impact on some businesses, but for others could cause them difficulties which might require other cashflow solutions such as invoice financing or working capital loans to be considered.

When does it apply?

There are numerous criteria which are required for the reverse charge to apply. These include requiring the supply to be for construction services, both parties to be VAT registered, and registered for CIS, requiring both parties to be unconnected, and for the customer to intend to make an ongoing supply of construction services to another party.

Why is this being introduced?

The main reason the Government is introducing the scheme is to try and combat fraud, in particular, what is known as missing-trader fraud, where shell companies are created to steal VAT.

What you need to do?

There are many different actions depending on the exact nature of your business and the work you carry out. You might need to modify your accounting and bookkeeping systems; you might need to be able to identify CIS contracts and identify end-user. If your income is only or mainly derived from subcontracting you will almost certainly be entitled to VAT refunds so it could make sense to apply to submit monthly returns to accelerate the refunds. This might sound complex – but the one thing we would recommend is to speak to your accountant in good time to ensure that you are set-up and ready in advance.

Henry is the Managing Director for AIMS Accountants for Business, a market leader in accountancy services for small, local and independent businesses, with 200 qualified accountants nationwide.