Introduction of VAT reverse charge on the construction sector

The introduction of VAT reverse charge on the construction sector will change how businesses account for VAT. Businesses may need to change the way they present information on their invoices to their customers and prepare their VAT returns.

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What is the VAT reverse charge?

Under the domestic reverse charge, the customer who receives the service will have to pay the VAT owed straight to HMRC instead of paying the supplier. Therefore, if you are making payments for construction works and the new VAT charge regime applies, you are not required to pay VAT to the subcontractor; instead you pay the VAT to HMRC. On the other hand, if you are a subcontractor receiving payments, you may only receive the net of VAT amount, which will naturally affect your cash flow.

Who does the VAT reverse charge apply to?

From 1 March 2021 the domestic VAT reverse charge must be used 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; and
  • reported within the Construction Industry Scheme (CIS).

The reverse charge only applies if both parties are registered under the CIS; both parties are VAT registered and VAT is chargeable on the supply.

When does it start?

The change was originally scheduled to come into effect from 1 October 2019, however after concerns raised by the industry bodies and accounting specialists highlighted in relation to the lack of preparation and the impact on businesses; the change was delayed by 12 months

The introduction of the domestic reverse charge for construction services has been further delayed by five months due to the impact of the COVID-19 pandemic on the construction sector, HMRC have announced. The changes to VAT will now apply from 1 March 2021.

How do you prepare?

In order to prepare for the VAT reserve charge, businesses will need to:

  • make sure your accounting systems and software can deal with the reverse charge;
  • consider whether the change will impact your cash flow; and
  • make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work.

If the VAT reverse charge does not apply you should follow the normal VAT rules

When must you use the reverse charge?

As listed in HMRC’s guidance page, 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

Does the domestic reverse charge apply to me?

HMRC have prepared a flow chart (below) to help businesses decide whether to apply normal VAT rules or the domestic reverse charge.

Are there any penalties for not implementing the reverse charge?

In their guidance, HMRC have stated the following:

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith. Any errors need be corrected as soon as possible… HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly

HMRC Guidance

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