What is Reverse Charge VAT?

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Reverse Charge VAT was originally due to be released in October 2019, but came into force on the 1 March 2021.

What is reverse charge VAT?

Reverse Charge VAT will change the way that businesses operating in the construction industry invoice customers and pay sub-contractors.

Who will it affect?

It will only affect VAT on supplies where payment is required to be reported through the Construction Industry Scheme, for example, payments between sub-contractors and contractors operating in the construction industry.

Why has HMRC introduced Reverse Charge VAT?

Reverse Charge VAT has been introduced to clamp down on Missing Trader Fraud. Under normal circumstances, a subcontractor would charge the main contractor for the work being carried out adding 20% VAT. At the end of the VAT quarter the subcontractor would declare the VAT and pay HMRC. However, organised criminal gangs have found a lucrative way to exploit this by frequently creating or taking over shell companies to steal the VAT whilst also providing actual construction services which is known as Missing Trader Fraud. Companies conducting this activity will originally behave normally, but after conducting the construction work will disappear without filing their VAT return and without paying the HMRC the VAT. These companies tend to operate for between six to nine months before vanishing without trace.

What does the introduction of Reverse Charge VAT mean?

Reverse Charge VAT means the VAT cash will no longer flow between businesses. A subcontractor will show VAT on an invoice to a contractor as a “reverse charge”. Therefore on each business transaction, VAT will be calculated as a paper exercise and be recorded on the invoice as the reverse charge. When the contractor pays the sub-contractor it will not include the VAT, they will only pay the net value. Only client facing organisations at the top of the construction supply chain will be required to charge VAT and pay VAT
to HMRC at the end of the VAT quarter.

As a rule of thumb, any organisation who is registered with the Construction Industry Scheme (CIS) will fall into the Reverse Charge VAT regime.

Opera 3 and Pegasus CIS have been updated to manage Reverse Charge VAT. For more information or guidance on this, please contact your Pegasus Partner.

Posted On: March 03, 2021