What is the VAT construction reverse charge?
17th February 2021
New rules on how VAT is handled in the building and construction services industry come into force on 1 March 2021. Read on to learn about what the VAT construction reverse charge is, who it applies to, and how it works.
What is the VAT construction reverse charge?
The VAT domestic reverse charge is a change in how VAT is charged for certain areas of the building and construction services industry. It forms part of the Construction Industry Services (CIS) scheme.
Under the new rules, businesses supplying construction services to VAT-registered customers (i.e. business-to-business transactions) will no longer be required to account for the VAT. Instead, the responsibility will fall on the customer.
HMRC says the charge is being introduced in a bid to help combat fraud. Currently the construction industry is targeted by organised criminals, who will charge VAT for the services they supply but then disappear without paying their VAT bill, scraping an additional 5-20% in profit. By moving the VAT charge down the supply chain HMRC hopes it will make this kind of activity impossible.
Similar schemes have already been introduced in other sectors, including mobile phone and computer chip retailers and wholesale energy suppliers.
The VAT construction reverse charge was originally due to come into force in October 2019, but was postponed for 12 months due to Brexit, only to be delayed again due to COVID-19. It is not expected to be delayed for a third time and will come into force next month, on 1 March 2021.
Who needs to use the construction reverse charge?
The charge applies to VAT-registered businesses who are supplying/receiving services that are reported under CIS (i.e. services supplied between construction subcontractors and contractors).
HMRC says you must use the reverse charge for the following services:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
You don’t need to use it if you’re not VAT registered and standard VAT rules apply for the supplier, however it’s important you make this clear in writing to the supplier to ensure they charge you VAT as normal.
The reverse charge also does not apply to end users, such as the people who eventually occupy a building that’s been constructed under CIS – this extends to landlords.
Finally, it doesn’t apply to subcontractors unless the answer to all of the following questions is positive:
- Are any of the supplies you are making within the scope of the CIS?
- Is the supply standard or reduced-rated?
- Is your customer VAT registered?
- Will your payment be reported under CIS?
- Are you sure the customer is not an end user?
You can find more information about when you need to use the reverse charge here.
What do I need to do?
Subcontractors
As a subcontractor your main responsibility will be to pass on the VAT charge when you issue your VAT invoice. However, you may need to change the way you reconcile customer payments against invoices, as VAT-registered customers will no longer be paying the VAT element on CIS-related supplies.
Remember this could have a knock-on affect on your cash flow as any VAT you previously held before making payments to HMRC will no longer be available. HMRC may also consider you a “repayment trader”, which means you claim VAT from HMRC rather than making a payment. HMRC recommends that repayment traders apply for monthly returns, rather than quarterly, as this will speed up the claim from HMRC and benefit cash flow.
Contractors
If you are a contractor who purchases CIS-regulated services then you will need to make sure you correctly account for reverse charge VAT invoices. You must pay VAT directly to HMRC as part of your normal VAT settlement process, rather than paying it to your supplier.
Remember, you will need to make sure your accounting system is ready to cope with the change, including any software you use.
It’s also important to note that if you are invoicing for mixed supplies that include a VAT construction reverse charge component then you must apply the reverse charge to the entire invoice.
Talk to the experts
We support construction businesses across the North East and we know the Construction Industry Scheme and VAT reverse charge are a source of confusion for many of our customers in the sector. If you have any questions about the new rules or need guidance on how to ensure your accounting systems are ready to cope with the changes, then please get in touch with our friendly Sunderland-based team.
