The CIS Reverse Charge VAT Scheme starts on the 1st March 2021 for companies who are contractors and subcontractors in the building industry. However, what is the construction Industry scheme or CIS?
CIS is a system where contractors deduct money from subcontractors payments and pass it directly to HMRC. These are treated like advance payments of tax and NI for the contractor. It isn't compulsory to register, but if you don't, deductions are taken from payments at a higher rate, This is just related to construction work. You can download a handy guide from the HMRC by clicking here.
If you are using subcontractors you need to check with the HMRC if the subcontractors are registered with them. Then, when you pay them, you usually need to make deductions from their payments and pass the money to the HMRC. You will need to file monthly returns and keep full records which can be done in Sage50c or Xero accounting software if you subscribe to the CIS modules. There are different rates on deductions depending on whether they are registered (20%), unregistered(30%), or gross payment status (0%).
This is an anti-fraud measure to prevent VAT fraud within the construction industry. It means you pay the VAT straight to the HMRC and not to the subcontractor who then may not then pay it over to the HMRC.
The end recipient to the service or the customer will be the one to account for the VAT, but there are some exemptions which you should look-up on the HMRC website. If the contractor is not VAT registered, for example, there is no VAT involved in the transaction anyway. For more information on Reverse Charge VAT see the HMRC website by clicking here. If the subcontractor, or supplier, is VAT registered they will need to clearly show on their invoices that the supplies are subject to reverse charge VAT, but they will not include the figure on the amount charged. The customer then needs to account for this VAT and send it to the HMRC on their VAT return.
They will not pay the VAT to the supplier, but they will pay to HMRC or offset this VAT against their VAT owed just as they normally would in the past. For mixed supplies of labour and material, the reverse charge element will apply to the whole supply, not just the labour element.
You may find that you may not be able to rely on VAT money for cashflow so you need to look into how this will affect you before it is put into action on March 1st 2021. If this change means that you will become a business who is entitled to repayments from the HMRC, you may want to move from quarterly VAT returns to monthly so you get your repayments sooner.
Suppliers do not enter the VAT in box 1 of their VAT return, but do record the sales in box 6. Customers enter the domestic reverse charge VAT in box 1, but do not put any values in box 6. They can reclaim the input tax on domestic reverse charge purchases in box 4 and include the purchases in box 7 as usual.
If anything I've written here resonates with you, call me on 01604 420057 and let's see how we can help you.