The VAT domestic reverse charge for building and construction services, to give it its full title, is a change in how VAT is handled for certain kinds of construction services in the UK, along with the building and construction materials used directly in those services (although it doesn’t apply to building and construction materials supplied separately and independently of any construction services).
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 sub-contractors.
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 (that is, it will be considered input tax for them, as if they’ve made the supply to themselves).
In even simpler terms, for services they provide, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC.
The payment received will be for the cost of the work done (plus materials used), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice.
The VAT domestic reverse charge for construction begins on 1 March 2021. It was initially planned to start from October 2019 but was postponed to October 2020 to “avoid the changes coinciding with Brexit” and “to help businesses and give them more time to prepare” according to HMRC.
However, due to the impact of the coronavirus outbreak on the construction industry, HMRC has extended the October 2020 date by a further five months.
It will depend upon when the tax point is. In most cases, this will be the date of issue of the VAT invoice, or the receipt of payment – whichever occurs first.
However, if a prepayment was made then it will be the date that the supplier received payment and if there is no invoice or the invoice was issued 15 or more days before the work is finished then it will be the date that the work was finished. This is known as the “Time of Supply” rules.
If the tax point is on or after 1 March 2021 then the reverse charge should be applied. If the tax point is before that date, current VAT rules apply.
HMRC says it will combat fraud, whereby construction businesses charge VAT for the services they supply but then disappear without paying their VAT bill – essentially taking with them a 5% or 20% additional profit that doesn’t belong to them (and very likely having provided the work at an uncompetitive and unfair discount because of this). The construction industry is targeted by organised criminals in this way.
By moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud impossible.
The introduction follows the success of similar, although not identical, reverse charge schemes for the likes of mobile phone and computer chip retailers, and wholesale energy suppliers.
It applies only to VAT-registered businesses who are supplying/receiving services that are reported under CIS. In other words, it applies to services supplied between the majority of construction sub-contractors and contractors in the UK.
If your CIS business is the recipient of construction services, and receives an invoice with the reverse charge applied, then you account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.
If your 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).
If you’re not VAT registered, you should make it clear to the supplier in writing.
Crucially, reverse charges do not contribute to a company’s potential VAT threshold. So if you aren’t registered for VAT then any attempt to apply the reverse charge will not push you over the limit.
Notably, the reverse charge also doesn’t apply to end users, such as the people who use a building that’s been constructed by the provided services, and nor does it apply to some of those connected to them, such as landlords or tenants.
For sake of clarity, HMRC says the VAT reverse charge for construction doesn’t apply to sub-contractors unless the answer to all of the following questions is positive: