06 May What is the VAT reverse charge for construction?
10 things you need to know
From 1 March 2021, those working in the UK’s construction industry may have to handle and pay VAT in a different way following the introduction of the new VAT reverse charge system. The system is designed to combat VAT fraud in the building and construction sector.
1. The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT registered contractors and subcontractors.
2. The scheme means that those supplying construction services to a VAT registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT and pay it to HMRC directly, rather than to the supplier. In simple terms, subcontractors will require the contractor they are working for to account for the VAT and pay the VAT to HMRC.
3. The reverse charge will have a significant impact on how businesses within the construction sector account for VAT and manage their cash flows. If you’re using cloud accounting software, the changes will be automatic in terms of the accounting. The new system may also affect your cash flow because the VAT you previously held onto before passing it quarterly/monthly to HMRC will no longer be available for any uses you might have put it to. Also, because you no longer pay VAT on your sales you might find you become what HMRC calls a repayment trader, meaning your VAT return always results in a reclaim of money from HMRC, rather than making a payment. Such businesses may wish to consider applying to move to monthly VAT returns, to speed up repayments received from HMRC.
4. The system applies only to VAT registered businesses who are supplying/receiving services that are reported under CIS. Therefore, it applies to services supplied between the majority of construction subcontractors and contractors in the UK but not non VAT registered individuals.
5. If your construction business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply for the supplier (so they will charge you the VAT and account for it as usual).
6. Reverse charge transactions are excluded from the VAT cash accounting scheme but you can remain on the scheme and continue to account for non-domestic reverse charge work on a cash accounting basis. However, if you act as a sub-contractor and all of your sales will be subject to domestic reverse charge, then you may want to stop using the scheme so that they can start to reclaim their input tax earlier on an invoice basis, rather than a cash basis.
7. The VAT reverse charge applies to standard and reduced-rate VAT supplies, but not to zero-rated supplies.
8. The reverse charge will only apply to suppliers of specified construction services to other businesses within the construction sector. These include the following:
- Construction, repair, extension, alteration, demolition and dismantling of structures or buildings (including offshore installations) whether they are permanent or not.
- Installation of heating systems, air-conditioning, lighting, power supply, drainage, ventilation, water supply, sanitation and fire protection in any structure or building.
- Painting or decorating the external or internal surface of any structure or building.
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
9. If you’re invoicing a customer for mixed supplies, some of which are not affected by the reverse charge, you should apply the VAT reverse charge to the whole invoice. This is to enable the system to be as easy to administer as possible.
10.If you’re unsure whether the reverse charge applies to the services you provide, you should contact your professional advisor or HMRC for advice. As a general rule, HMRC advise that if in doubt, provided the recipient is VAT registered and the payments are subject to CIS, it is recommended that the reverse should apply. HMRC’s technical guide also has further detailed guidance.