Domestic reverse charge VAT – Construction

As of the 1st of March 2021, there will be a new VAT legislation taking effect for the construction industry introduced by HMRC. The new legislation is called “Domestic Reverse Charge” and it will impact those working within the construction industry.

The legislation is being introduced to tackle fraud which currently takes place when construction businesses charge VAT for the services they supply but then “disappear” without paying their VAT bill. The construction industry is specifically targeted by organised criminals for this. HMRC have witnessed other areas of business suffering the same challenges and the implementation of reverse charges have been successful – this includes mobile phones, computer chip retailers and wholesale energy suppliers.

In this blog, we’ll outline the key facts you need to be aware of and we’ve also put together a guide to help you prepare as a business.

What is the VAT domestic reverse charge for construction?

Domestic reverse charge (DRC) is a new way of accounting for VAT, which is applicable to all VAT registered construction businesses within the UK.

The new legislation changes the VAT liability between suppliers and customers. The change moves the VAT liability from the supplier (subcontractor) of a service within the construction industry to the customer (contractor).

The VAT reverse charge for construction is an extension of the Construction Industry Scheme (CIS) and applies to transactions which are reported under the CIS and are between VAT-registered contractors and sub-contractors.

When is the reverse charge being introduced?

The VAT domestic reverse charge for construction comes into force on the 1st of March 2021. It was initially planned to be introduced from October 2019, however it has been postponed due to Brexit and to allow businesses more time to prepare. The coronavirus pandemic has also impacted the date of implementation.

How will this affect my business?

If you are a VAT-registered subcontractor (supplier) who provides building and construction services to a VAT-registered contractor (customer) who is CIS-registered then you no longer need to account for the VAT. The invoices supplied to customers should state that the VAT reverse charge is applied and they are responsible for this.

VAT-registered contractors (customers) will need to account for both input and output tax on invoices received from VAT-registered subcontractors.

Who does the VAT reverse charge for construction services apply to?

The new legislation only applies to VAT-registered businesses who are supplying/receiving services that are reported under CIS.

According to HMRC, the reverse charge applies to the following:

• construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
• construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
• installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
• 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 internal or external surfaces of any building or structure

Who is exempt from this?

There are some exemptions to the Domestic Reverse Charge. The reverse charge does not apply to the following supplies:

• Supplies of VAT exempt building and construction services
• Supplies that are not covered by the CIS, unless linked to such a supply
• Supplies of staff or workers

In addition to this, the reverse charge does not apply to taxable supplies made to the following customers:

• A non-VAT registered customer
• “End users” i.e a VAT registered customer who is not intending to make further on-going supplies of construction
• “Intermediary suppliers” who are connected e.g a landlord and his tenant or two companies in the same group.
• Overseas customers

What do I do if the VAT reverse charge for construction doesn’t apply to the services I provide?

If this doesn’t apply to you – normal VAT rules will apply.

I’m a sub-contractor – what does this mean for me?

If you are a sub-contractor, meeting the criteria for the reverse charge, there will be little impact for you. The main change will be upon invoicing you will be passing on the VAT charge which you would’ve had to account for.

You will need to ensure your accounting software is up to date as it will need to reflect the latest changes.

Most importantly, you will see changes to your cash flow as the VAT you were previously holding onto before passing to HMRC upon completing your monthly or quarterly returns, will no longer be available to use as working capital.

You’ll also change the way you complete your VAT return, you will not need to enter Box 1 but instead disclose the value of sales in Box 6.

I’m a contractor – what does this mean for me?

Again, providing you meet the criteria for the reverse charge, you will need to ensure that when you receive the reverse charge VAT invoice, you correctly account for them. You will need to pay any VAT due directly to HMRC.

You will also need to ensure your accounting software is up to date with the latest changes.

You may see a positive gain to your cash flow as the VAT you previously had to pay when paying sub-contractors will now be netted off in your VAT return. It’s worth checking that the invoices you receive are correct though in order to avoid paying too much too little VAT.

When completing your VAT return, you will disclose in Box 1 the output tax on purchases to which domestic reverse charge VAT applies rather than Box 6.

Does the VAT reverse charge apply to work provided for home/domestic users?

No – it only applies to VAT-registered businesses registered for the CIS.

Can I choose whether to apply the VAT reverse charge?

The new legislation is mandatory to the situations as described above.

Unsure whether this applies to the services your business provides?

We would recommend seeking professional advice, whether that be HMRC directly, your accountant or a VAT specialist.

Our chartered accountants are fully equipped to help you understand this in more detail so please feel free to reach out to us as well: [email protected]