Today I will try and explain how the new reverse charge rules for the construction industry will actually impact on builders and their customers.
The big boys have been aware of the impending changes for a while, but in a small survey I conducted of a number of our clients in the small to medium sector, I discovered that most had only a vague idea what I was talking about. This was scary as the new rules come into effect on 1st October 2019.
What exactly is VAT Reverse Charge?
The reverse charge is a major change to the way VAT is collected in the building and construction industry and means that the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier, and will only apply to individuals or businesses registered for VAT and will affect you if you supply or receive specified services that come under the Construction Industry Scheme (CIS).
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 input tax for them, almost 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).
Also, the charge applies to both standard and reduced-rate VAT supplies but does not apply to zero-rated supplies.
Why are HMRC changing VAT Reverse Charge?
HMRC says it’s an anti-fraud measure to combat rogue firms who charge VAT for the services they supply but then disappear without paying their VAT bill and making an additional 5 to 20% profit that doesn’t belong to them. Organised crime has targeted the construction industry in recent years and so, by moving the VAT charge down the supply chain, HMRC intends to make this kind of fraud virtually impossible.
The introduction follows the success of similar, reverse charge schemes introduced for the likes of mobile phone, computer chip retailers and wholesale energy suppliers.
Who does VAT Reverse Charge apply to?
It applies to VAT-registered businesses who are already CIS registered and thus 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.
However, 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).
Also, the reverse charge 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.
What construction services does the VAT Reverse Charge apply to?
According to HMRC, the reverse charge applies to the following:
- Construction, alteration, repair, extension, demolition or dismantling of buildings or structures or of any works forming, part of the land, including roadworks, power lines, water mains and sewers.
- Installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection.
- Painting or decorating the internal or external surfaces of any building or structure.
Also included are any services that form an integral part of the above items or are preparatory to them, or are for rendering them complete (for example, site clearance or earth-moving excavation):
Remember that the reverse charge applies to the services listed above plus any construction materials used directly for those services.
Is anything exempt from the VAT Reverse Charge?
Yes, HMRC on their website under ‘Reverse charge – Guidance Notes’ have listed a number of services from fracking to the installation of CCTV, for a detailed list go to:
Other frequently asked VAT Reverse Charge questions:
1. I’m a sub-contractor, what does the charge mean for my business?
Answer: It should mean very little because when you issue your VAT invoice you will merely be passing on the VAT charge that you would have had to account for in any event
2. I’m a contractor, what does the charge for construction services mean for my business?
Answer: If you’re a contractor it means you need to ensure that when you receive reverse charge VAT invoices you correctly account for them. You may even gain a cash flow advantage because the VAT you previously had to pay when paying sub-contractors, but could not reclaim until your next VAT return, is simply netted off in your VAT return.
3. Does the charge for construction services apply to work provided for home/domestic users?
Answer: No, it only applies to VAT-registered businesses registered for the CIS. If the services are provided for the general public then standard VAT rules apply.
4. What if I’m invoicing for mixed supplies that includes a VAT reverse charge component?
Answer: You just apply the reverse charge for the whole invoice, which is intended to make the system as simple as possible to administer.
5. Will the reverse charge still apply after Brexit?
Answer: Yes it will, because it’s a domestic UK VAT rule and applies only us and will therefore continue to be in force following the UK’s exit from the EU.
So, there you have it folks. There are dozens of other potential questions I could have answered, but I decided to limit the examples to the question that I’ve been asked most often.
However, if you would like a more detailed explanation of any of the points raised today please contact me using the ‘Contact Us’ button above.
If you would like more detailed information on some aspect of UK Tax, send me an e-mail and I’ll be pleased to advise further.