From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:
- for individuals or businesses who are registered for VAT in the UK
- reported within the Construction Industry Scheme
Check when you must use the reverse charge on your sales, purchases or both.
- Find out how the charge works if you supply services.
- Find out how the charge works if you buy services.
- Read more detailed guidance about the reverse charge.
There will also be an amendment to the original legislation, which was laid in April 2019, to make it a requirement that for businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers.
The Domestic Reverse Charge VAT is a big change being implemented in the way VAT is being collected in the building and construction industry.
This has been set up to tackle fraud. This will mean that fraudsters will no longer be able to set up a construction business, charge VAT to customer then disappear before paying the VAT to HMRC. This practice is known as missing trader fraud and the change means that the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier. It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).
This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
We would like to draw your attention to the details on the HMRC website which states the following –
You need to prepare for the introduction date by:
• checking whether the reverse charge affects either your sales, purchases or both
• making sure your accounting systems and software are updated to deal with the reverse charge
• considering whether the change will have an impact on your cashflow
• making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate,
What contractors need to do
If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.
What sub-contractors need to do
If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.
The reverse charge does not apply to consumers or final customers of building and construction services. Any consumers or final customers who are registered for VAT and Construction Industry Scheme will need to ensure their suppliers do not apply the reverse charge on services supplied to them.
For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.
Services affected by the domestic reverse charge
The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies.
There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.
The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.
It also does not apply to some services.
These are those supplied to end users or intermediaries connected with end users. Find out more found in the End users and intermediary supplier businesses section.
Employment businesses who supply staff and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge. Read the Applying the domestic reverse charge for construction services to certain sectors or types of transactions section for more information.
You will have to apply the reverse charge if you supply any of these 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
For more detailed information please visit the HMRC website or give us a call to check what you need to do if you are affected by this change. Click here