Construction Industry Domestic Reverse Charge for VAT

Major change to the VAT system in the construction industry

From 1 March

The government has introduced the VAT domestic reverse charge as an anti fraud measure. From 1 March 2021, the businesses must account for the reverse charge for VAT 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 (CIS)

What is the reverse charge?

The reverse charge is a mechanism for accounting for VAT where the customer charges themselves VAT, rather than the supplier charging VAT. The reverse charge has been introduced in an attempt to prevent missing trader fraud.  As the reverse charge makes it the customer’s responsibility to account for VAT, there is no opportunity for the supplier to disappear without paying the VAT to HMRC.

Who does it affect?

The new reverse charge will affect customers and suppliers in the construction industry if they are buying or supplying the following services:

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

When you must not use the reverse charge

Do not use the charge for the following services, when supplied on their own:

• drilling for, or extracting, oil or natural gas
• extracting minerals (using underground or surface working) and tunneling, boring, or construction of underground works, for this purpose
• manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
• manufacturing components for heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
• making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
• installing seating, blinds and shutters
• installing security systems, including burglar alarms, closed circuit television and public address systems

How it works if you supply services

If you sell building and construction services

Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:

• your customer is registered for VAT in the UK
• payment for the supply is reported within the Construction Industry Scheme (CIS)
• the services you supply are standard or reduced rated
• you’re not an employment business supplying either staff or workers, or both
• your customer has not given written confirmation that they’re an end user or intermediary supplier

Click on the link below to see the government’s flowchart to help you decide if you need to use the reverse charge:

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878587/Annex_1_-_VAT_domestic_reverse_charge_for_building_and_construction_services.pdf

How it works if you buy services

If you buy building and construction services, use the flowchart below to help you decide if you need to use the reverse charge:

• payment for the supply is reported within the Construction Industry Scheme (CIS)
• the supply is standard or reduced rated
• are not hiring either staff or workers, or both
• you’re not using the end user or intermediary exclusions

Click on the link below to see the government’s flowchart to help you decide if you need to use the reverse charge

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878594/20.01.15_annexe_2_customer_flowchart.pdf

How to prepare

You’ll need to:

• identify instances where you supply services to other businesses in the construction sector (rather than to a consumer of those services) or receive them for the purposes of selling them on
• make sure your accounting systems and software can accommodate the reverse charge
• consider whether the change will impact your cash flow
• make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work
• review contracts with customers and suppliers to see whether they are impacted

For more detailed guidance about the reverse charge please follow the link below to the government’s ‘VAT reverse charge technical guide.’

https://www.gov.uk/guidance/vat-reverse-charge-technical-guide

If you have any questions regarding the changes and think you will be affected, please do get in touch with your Swindells’ Partner who will be able to advise you further. or download our factsheet by clicking on the image below: