What is the VAT Reverse Charge for construction?
The VAT domestic reverse charge for building and construction services is a change in how VAT is handled for certain construction services and building materials used directly for these services (unless supplied separately) within the UK.
The new reverse charge system is an extension of the existing CIS and applies only to transactions between VAT registered contractors and sub-contractors registered for the CIS.
In short, it means that the suppliers of goods or services to a VAT registered customer, will no longer be involved in the payment of VAT to HMRC. Instead, the customer receiving the services must pay the VAT to HMRC and can recover the VAT subject to the normal rules for VAT recovery.
(Example: Subcontractors will require contractors employing them to handle VAT and make the payment directly to HMRC.)
When does the VAT Reverse Charge for construction come into effect?
The VAT Reverse Charge comes into effect from 1st October 2019.
Why is the VAT Reverse Charge for construction being introduced?
The VAT Reverse Charge has been introduced by HMRC as a way of tackling the issue of VAT fraud, particularly in instances where the contractor pays the sub-contractor the chargeable price plus VAT, but the subcontractor fails to account for the VAT to HMRC.
HMRC have calculated an approximate loss of £100 million due to VAT fraud in the construction industry. Therefore, it is likely that HMRC will look to target construction firms who get it wrong.
What if my project begins before the VAT Reverse Charge takes effect, but ends after?
If the tax point is on, or after the 1st October 2019, then the VAT Reverse Charge should be applied. However, if the tax point is before the 1st October 2019, then the existing rules apply.
Does the VAT reverse charge for construction apply to all VAT rates?
The VAT reverse charge applies to standard and reduced-rate VAT supplies, but not to zero-rated supplies.
Is anything exempt from the VAT reverse charge for construction?
On the HMRC website, there are a number of services listed as exempt from the VAT reverse charge.
- drilling for, or extracting, oil or natural gas
- extracting minerals (using underground or surface working) and tunnelling, 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
What does the VAT reverse charge for construction mean for contractors?
As a contractor purchasing CIS regulated services, you need to ensure that you correctly account for VAT reverse charge invoices. To ensure you don’t pay too much or too little VAT, it is essential to ensure the invoice you receive is correct and eligible for the reverse charge.
You may benefit in terms of cash flow, as the VAT you had to pay under current rules is simply netted off in your VAT return. However, it should not impact your overall VAT bill.
What does the VAT reverse charge for construction mean for sub-contractors?
As a sub-contractor providing CIS regulated services, you will be passing on your VAT charge that you would have had to account for under existing rules.
Your cash flow may be affected as you will not have the VAT you held before making quarterly payments to HMRC.
Does the VAT reverse charge for construction apply to work provided for domestic users?
As the VAT reverse charge applies only to transactions between VAT registered businesses, it does not affect services provided for non-VAT-registered individuals. In this case, the standard rules apply.
Does the VAT reverse charge affect work overseas, and will Brexit affect it?
The VAT reverse charge is a domestic VAT rule, it applies only to UK companies providing construction services to VAT registered businesses and will not be affected by Brexit.
For more information about the VAT domestic reverse charge for building and construction services, you can visit the HMRC website by clicking here. Alternatively, feel free to contact us and discuss how your business can prepare.