How the VAT Reverse Charge Affects Construction and Building Services
If you are working in the UK’s construction industry, then you may have heard of the new VAT reverse charge system coming 1st March 2021. To understand how the changes may affect you – we’ve put together a summary.
The full name of the new system is the “VAT domestic reverse charge for building and construction services.” It will apply to certain kinds of construction services in the UK and to building and construction materials used directly in those services. It will not apply to building and construction materials supplied separately and independently of any construction services.
At DS Burge & Co chartered accountants, we’ve detailed below the scheduled changes, modifications, and updated requirements of the VAT domestic reverse charge. Between now and the beginning of March, when the charges come into effect, there is an opportunity to review and edit invoice forms, tax forms, and other reporting requirements. Software is also being adapted that can help facilitate the new way of doing business.
Overview: Looking at the essentials
The change applies only to those individuals and businesses:
- Registered for VAT in the UK.
- Reporting within the Construction Industry Scheme (CIS).
In effect, the change applies to contractors and subcontractors in building and construction services and is an extension of the CIS. Furthermore, the Domestic Reverse Charge applies only to transactions that are:
- Reported under the CIS.
- Between VAT-registered contractors and subcontractors.
If you are invoicing the end-user (e.g. house owner consumer), then absolutely nothing changes. You invoice them with VAT as usual.
The essence of the change is sometimes described as moving the handling of VAT “downstream” from the subcontractor, as at present, to the contractor. VAT reverse charge shifts responsibility from the supplier of the services and materials (usually the subcontractor) to the buyer of the services and materials (usually the contractor). As you would expect, this gives additional VAT reporting and payment responsibilities to contractors.
The primary reason offered by HMRC for this shift is to cut down on ‘missing trader’ fraud, where companies receiving high net amounts of VAT from their customers have no intention of ever paying over to HMRC. The scheme should also prevent any unscrupulous contractors from gaining work by greatly underbidding competitors – knowing their profit will be boosted by keeping the VAT payments for themselves. Now, for services subcontractors supply, they will pass along responsibility to the customer (i.e. contractor) to pay the VAT directly to HMRC.
When does VAT reverse charge begin?
Introduction of the VAT changes was planned for an October 2019 start date, postponed until October 2020 to avoid further complicating Brexit. Due to the impact of the coronavirus crisis on the industry, the changes have been delayed for another five months to the current March 2021 starting date. Given the continued uncertainties of the coronavirus pandemic, additional changes are at least possible.
What if a construction project straddles the 1st March 2021 beginning of the new system? That will depend upon the “tax point.” Usually, the tax point will come with issuing the VAT invoice or with receiving payment of the invoice — whatever comes first. Prepayments may be handled differently under “Time of Supply” rules.
Overall, if the tax point is 1st March 2021 or later, then the reverse charge system applies. A tax point before that start date means that current VAT rules will apply.
What are subcontractors and contractor roles?
Under the new VAT reverse charge system, the subcontractor providing CIS-regulated construction services to a VAT-registered customer (usually a contractor) will send the contractor a “request for net payment” for their services rather than a VAT invoice like they used to. This means that, not the subcontractor but the contractor (customer) must account for the VAT on their VAT return.
What you will have to do as a subcontractor is change how you treat your customer’s payments with your issued invoices. Your accounting software will be able to integrate this change into your invoice forms. If you use cloud software, then the changes should be automatic. As a result, subcontractors will no longer have the mid-quarter cash flow advantage that they had under the old scheme between collecting for the VAT and paying it.
If you are a contractor (defined as a purchaser of CIS regulated construction services), the chief responsibility will be to ensure that when your subcontractors submit their reverse charge VAT invoices, you correctly account for those payments. That means you will pay the contractor net of VAT and pay the VAT that is due directly to HMRC with your regular VAT payment. You no longer will pay the VAT on CIS related services to your supplier. New software, of course, will be coming with the proper accounting built-in. If you use cloud software that should be automatic. As a result, contractors will no longer have the mid-quarter cash flow disadvantage that they had under the old scheme between paying the VAT and reclaiming it on their VAT return.
On an individual’s or business’s VAT return, there will be explicit instructions to the supplier (subcontractor) and customer (contractor) with different boxes to check.
Who does the VAT reverse charge apply to?
For subcontractors understandably unsure of where they stand, HMRC says that the reverse charge applies to you only if your answer to all these questions is yes:
- Are any of the services you are supplying within the scope of the CIS?
- Is the supply standard or reduced rate?
- Is your customer VAT registered?
- Will payment of your invoice be reported under CIS?
- Are you certain that your customer is not an “end-user”?
The final question relates to a major exclusion from the VAT requirements: businesses and individuals who are involved with the industry but not part of it. Examples are “end users” of a building constructed by the provided services or other connected individuals such as landlords and tenants.
To check the application of VAT changes to you, HMRC provides a list of dozens of specific subtypes of construction in their VAT reverse charge technical guide. An example of one category: “Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations…”
HMRC offers an equally specific list of dozens of exclusions from the VAT changes. But an example of one category is “extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose…”
DS Burge & Co for financial expertise
Helping construction companies around Surrey & London since 1980, we’ve gained a wealth of experience with services to both contractors and subcontractors. We welcome every client with a friendly professional service that focuses on individual needs.
Our aim is to help you become more efficient, more profitable, and free your time from regulatory hassle. For example, we can help with:
- Preparation and filing of accounts for individuals, partnerships, and limited companies
- Tax planning
- Preparation of corporation tax returns for online submission to HMRC
- Advising business start-ups
- Construction Industry Scheme (CIS)
- VAT returns
- Payroll and Pension Auto Enrolment
- Raising capital
We are experts on all compliance requirements of the VAT system, including the new VAT domestic reverse charge changes. We can help you and your business achieve a smooth and straightforward transition up to and after the beginning of March 2021.
Be sure to check back regularly for information, insights, and updates on emerging important issues that every aspect of financial changes and financial accounting that affect your business.
The first step is to reach out to us. We can help you assess your individual situation and provide the full support that you need. We are ready to answer your questions and discuss how we can help.