VAT Reverse Charge
What Is The VAT Domestic Reverse Charge For Building & Construction Services?
HMRC has introduced the VAT domestic reverse charge for building and construction services which applies from 1 October2019 and has published Guidance Notes. However, there will undoubtedly be problems with the new system.
Our expert Consultants can help explain the new rules and provide further detailed guidance on how the VAT domestic reverse charge for building and construction will affect your cash flow and what you can do about it.
The new VAT reverse charge rules will definitely impact all Specialist Contractors, Trade Contractors and Subcontractors, so if you have a problem please call our friendly team and speak to one of our expert Consultants on 01773 712116 or email email@example.com. You will not be charged unless you decide to appoint one of our Consultants to act on your behalf.
The domestic reverse charge will be introduced without a transitional period and will have a significant impact on the accounting practices and cash flow of businesses in the construction sector.
VAT Reverse Charge Background
The aim of this measure is to combat missing trader fraud in the construction sector in a similar way to the previously introduced domestic reverse charges for the sale of computer chips and mobile phones.
Under the new regime, VAT-registered Specialist Contractors, Trade Contractors and Subcontractors who supply certain construction services to another VAT-registered business (e.g. a Main Contractor or another subcontractor) for onward sale, will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.
The recipient of those services must then account to HMRC for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the Specialist Contractor, Trade Contractor or Subcontractor. The recipient can then recover that VAT amount as input tax, subject to the normal rules.
Which Services Will It Apply To?
The new domestic reverse charge will apply to supplies of ‘specified services’ between VAT registered businesses where the recipient then makes an onward supply of those specified services.
It applies to the following building and construction services at either standard or reduced rate VAT:
- 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, pipe-lines, 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.
It also applies to services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in the bullet points 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.
The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge.
Where specified services have been provided then subsequent services on the same site by the same supplier may also be covered by the domestic reverse charge, if both parties agree.
This has been introduced to speed up the decision-making process on whether the domestic reverse charge should apply.
However, where the original services did not come within scope of the domestic reverse charge, but subsequent services do, then the VAT treatment changes. Businesses will need to review and monitor the VAT position throughout a project.
Which Services Are Excluded?
The domestic reverse charge will apply to specified services unless:
- The services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building.
- The recipient makes onward supplies of those construction services to a connected company.
- The recipient is not VAT registered, or required to be VAT registered.
- The recipient is not registered for the CIS.
- The supplier and recipient are landlord and tenant or vice versa, or
- The supplies are zero-rated.
An end user is a person who receives the specified services for any purpose other than making an onward supply of those services. Where the customer has not provided confirmation that it is an end user either in writing, an email, or in the contract, HMRC’s guidance is that the supply will come within the scope of the domestic reverse charge and no VAT is charged.
However, on occasions it will be clear to the Specialist Contractor, Trade Contractor or Subcontractor that its customer is an end user and should be charged VAT but the customer has not given confirmation. In these cases, HMRC’s latest guidance says that it will be acceptable to charge VAT in the normal way.
In addition to confirming if your customer is an end user you should also require them to confirm their VAT and CIS status and provide their VAT number. We would recommend that this is confirmed in the contract before any invoices need to be raised.
Where goods and building materials are provided together with construction services and in the course of the construction work then the reverse charge also applies to these goods.
Invoices for services subject to the domestic reverse charge must include all the information required on a normal VAT invoice. However, they must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT. There is no specific wording but HMRC provide examples of suitable wording: “Reverse charge: VAT Act 1994 Section 55A applies” “Reverse charge: S55 VATA 94 applies” “Reverse charge: Customer to pay VAT to HMRC”.
Where customers issue authenticated tax receipts or self-billing invoices HMRC’s recommended wording is: “Reverse charge: we will account for and pay the output tax due to HMRC” “Reverse charge: as the UK Customer we will pay the VAT due to HMRC”.
Impact On Specialist Contractors, Trade Contractors & Subcontractors
The implications for you and your cash flow:
- You will still be paying VAT to your suppliers and some subcontractors but NOT collecting it from the Contractor.
- Your cash flow will be hit until the end of each VAT accounting period.
- You will no longer be able to rely on VAT money for cashflow.
- The onus will fall on major Contractors to pay very large sums of money to the exchequer.
- Ensure your accounting systems are capable of processing reverse charge supplies.
- The whole of industry will need to get to grips with a new accounting system, or risk being mired in complex red tape.
- The potential for confusion and manipulation is enormous
What Action Should You Take?
- Ensure you fully understand the new arrangements – see seminar details below.
- Review supplies made to and received from other VAT registered contractors to establish where these will be subject to a reverse charge from October 2019.
- Check any guidance supplied by the Main Contractor with whom you are in contract.
- Where necessary obtain notification from customers that they are an end user and confirmation of their VAT registration and CIS status.
- Consider any adaptions required to ensure accounting systems can deal with this change and,
- Consider the impact on cash flow from October 2019 and if there are any other ways to mitigate this.
Construction VAT Reverse Charge Problems?
If you have any kind of problem with the VAT reverse charge for building and construction services, it is definitely worth getting some professional advice sooner rather than later.
Why not use the Ask Streetwise feature on this site to ask our team of expert Consultants for help if you have a problem relating to the payment of VAT on construction services?
Or simply give us a call and speak directly to one of our expert Consultants for Free initial advice on 01773 712116 or email: firstname.lastname@example.org. You will not be charged unless you decide to appoint one of our Consultants to act for you.