A VAT-registered subcontractor supplies standard-rated construction services to a VAT-registered contractor within the Construction Industry Scheme, and the contractor has not given the subcontractor written confirmation that it is an 'end user' under section 55A of the VAT Act 1994. Under HMRC's domestic reverse charge for building and construction services, who accounts to HMRC for the output VAT on this supply?
- The subcontractor, in the normal way, because the reverse charge only applies where the customer is an end user
- Neither party, because construction services supplied between two VAT-registered CIS businesses are automatically zero-rated
- The contractor, who self-accounts for the output VAT on the reverse charge basis instead of paying it to the subcontractor
- Whichever party has the larger annual turnover, as determined case by case by HMRC
Why C? And why not the others?
Correct answer: C. The contractor, who self-accounts for the output VAT on the reverse charge basis instead of paying it to the subcontractor
Under the domestic reverse charge for building and construction services, where the supply is between two VAT-registered CIS businesses and the customer has not confirmed end-user status, the customer (the contractor here) self-accounts for the output VAT on its own VAT Return instead of the supplier charging and collecting it, reversing the normal flow of VAT accounting. The option leaving the subcontractor responsible describes exactly the situation the reverse charge is designed to prevent applying to; it would only be correct if the contractor had given written end-user confirmation, taking the supply outside the reverse charge, which did not happen here. The option claiming automatic zero-rating misdescribes the mechanism entirely: the reverse charge does not remove VAT from the transaction, it only shifts who is responsible for accounting for the VAT that is still due at the standard or reduced rate. The option basing responsibility on relative company size invents a criterion that plays no role in HMRC's rules, which turn on end-user status and CIS/VAT registration, not on the parties' comparative turnover.
Source: GOV.UK: Check when you must use the VAT domestic reverse charge for building and construction services