VAT obligations for Quote 1 The VAT registered Sub-Contractors’ customer in this case is the Contractor. So, they will not charge the Contractor VAT for their services. Instead, they will invoice the Contractor the net amount, stating on the invoice “Customer to pay the VAT to HMRC”. The Contractor will need to account for the Sub-Contractors’ output VAT, and input VAT on their own VAT return under the domestic reverse charge rules – a reminder of which is below.
The VAT position of Mr Smith Regardless which quote Mr Smith opts for, as the end user in the supply chain he will be charged VAT in the normal way. However, as he’s not able to recover the VAT he is being charged, it would be cheaper for him to go for quote 2 and engage directly with the various businesses, seeing as the Painter and Decorator is not registered for VAT. Other points to note In the case of the Sub-Contractors in quote 1 – because they’re not charging VAT to the Contractor, they’re at a disadvantage from a cashflow perspective because they only receive from the Contractor the net amount of their supplies and will have suffered VAT on materials they have purchased in order to perform their supplies. It’s therefore common practice for Sub- Contractors to apply to HMRC to submit monthly VAT returns to make sure they receive back the VAT suffered on their purchases more quickly. If most of their supplies are to Contractors and subject to the domestic reverse charge rules, they will likely be repayment traders, i.e. they’ll receive VAT repayments from HMRC as their input VAT (VAT suffered on purchases) exceeds their output VAT (VAT collected on sales). It’s important for Sub-Contractors and Contractors to check that the services being invoiced are activities covered by the Construction Industry Scheme (CIS), that their customer is CIS registered and that both parties to the contract are VAT registered for the reverse charge to apply. VAT registration can be validated using the UK VAT number checker www.gov/uk/ check-uk-vat-number. Contractors should also prioritise checking whether their customer is an end user or not to determine whether the domestic reverse charge should apply, or if VAT should be charged. For example, if a Contractor is working for a landlord who is acting on behalf of some tenants, the landlord would be considered an intermediary, and the tenants would be the end users.
And if the landlord intermediary is CIS and VAT registered and the work being invoiced is for standard/reduced rated activities covered by CIS, reverse charge VAT would apply - unless the landlord intermediary provides an end user statement to the Contractor, in which case the Contractor should charge VAT as normal. Summary reminder of the Domestic Reverse Charge The domestic reverse charge rules came into effect from 1 March 2021. They were introduced to stop sub-contractors from charging VAT to end users but not paying over the VAT collected to HMRC. The rules apply to all standard or reduced rated supplies of activities covered by the CIS between VAT registered businesses where the payment for the supply is reported within the CIS. It does not apply to zero rated supplies. The rules do not apply where the end user is VAT registered but not making an onward supply of the construction services it receives. When the rules are applicable, the Sub- Contractor does not charge VAT on their invoice to the Contractor they are working for. Instead, they invoice for the net amount and state on the invoice to the Contractor that VAT must be accounted for by them on their VAT return. The Contractor pays the Sub-Contractor the net amount of the invoice and includes the VAT as both output VAT (VAT on sales) in Box 1 and input VAT (VAT on purchases) in Box 4 on their VAT return. The Contractor also includes the net amount in Box 7 (Net Purchases) on their VAT return. The Sub-Contractor includes the net amount only in Box 6 of their VAT return. Keeping up? Well done. CIS, VAT, and the domestic reverse charge can be complex topics but we’re here to help you navigate them with ease. For bespoke advice on taxes within the construction sector contact Paula or one of the team by calling 0330 058 6559 or emailing hello@scruttonbland.co.uk
The Contractor will invoice Mr Smith for £25,000 plus VAT.
The Sub-Contractors will need to include the net amount invoiced to the Contractor in Box 6 of their VAT returns (net sales). The Contractor will need to include the reverse charge VAT they are paying to HMRC on behalf of the Sub-Contractors in Box 1 (VAT on Sales) and Box 4 (VAT on Purchases), as well as the net amount in Box 7 (net purchases). They will also include the VAT charged to Mr Smith in Box 1 (VAT on Sales) and the net amount charged to Mr Smith in Box 6 (net sales). VAT obligations for Quote 2 As all the above are contracting directly with the end user, Mr Smith, the domestic reverse charge will not apply. All the above will invoice Mr Smith directly and charge net plus VAT, except for Painter and Decorator A who will only charge the net amount as they’re not VAT registered. Therefore, Builder B, Electrician A and Plumber A will all include the VAT charged to Mr Smith in Box 1 of their VAT returns and the net amount in Box 6 of their VAT returns.
P R O P E R T Y A N D CONSTRUCTION | SCRUTTON BLAND | 1 5
Made with FlippingBook Learn more on our blog