VAT Changes for the Construction Industry

From 1st March 2021, VAT-registered subcontractors will no longer charge VAT on certain construction services to another VAT-registered business. Instead, the customer will ‘self-account’ for any VAT due – this is known as the Reverse Charge.

The Reverse Charge is being introduced in the construction industry to tackle ‘missing trader fraud’. Missing trader fraud occurs when construction companies are formed and deliver services. Rather than pay the output VAT charged on their sales to HM Revenue and Customs (HMRC), they soon close the business and disappear with the VAT they collected from their customers.

The Reverse Charge rules will mean that the VAT will no longer flow around the supply chain and is not paid until it reaches an ‘end user’ or private individual.  

Current rules

Where a VAT registered subcontractor providing construction services, then the following VAT rates could apply:

• 20% standard rate
• 5% reduced rate (for certain conversions and renovations)
• 0% zero rate (for certain new-build residential work)

The appropriate rate of VAT will be charged on the services provided by the subcontractor.  The customer will recover this VAT where entitled to do so.

Who will the Reverse Charge affect?

The Reverse Charge may apply when a VAT-registered construction business supplies construction services to another VAT-registered construction business.

For simplicity, the definition of the affected construction services, are broadly the same as those that apply to the Construction Industry Scheme (CIS scheme) but see below for more detail.

Contractors and sub-contractors who are likely to be affected may:

• supply their services to other larger contractors
• work through a recruitment agency
• work through an umbrella company

The Reverse Charge only applies to standard and reduced rated services. Zero rated services are unaffected.

Flowchart for deciding whether to apply the reverse charge

HMRC have produced a flowchart to help decide whether you should apply the reverse charge. 

Which building and construction services are affected by the Reverse Charge?

As we said earlier, services which are required to be reported through the CIS scheme may be subject to the new VAT rules.

These services are as follows:

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.

This list is not exhaustive and indeed there are some exclusions to the affected supplies and rules regarding so-called ‘mixed supplies’.

Are there any exceptions to the Reverse Charge?

Firstly, it’s worth reiterating that the Reverse Charge may only apply where both parties are VAT registered. Consequently, if the customer is a member of the public, the Reverse Charge rules do not apply, and VAT should be charged to the individual as normal.

Otherwise, the main exception to the new reverse charge rules is where the recipient of the services is an ‘end user’ – someone who receives the construction services but does not supply them on. For example, the person who owns the property being worked on would be an ‘end user’.

An example of an ‘end user’

The construction of a new factory

The VAT-registered subcontractors invoice a main contractor for their services. The main contractor invoices the factory owner for the overall construction work.  

The VAT-registered subcontractors will not charge VAT on their invoices to the main contractor, who will instead account for the VAT on its own VAT return under the reverse charge.

Although the factory owner may be registered for VAT, the main contractor will charge VAT on the services provided to the factory owner, because the factory owner meets the definition of an ‘end user’.

What happens to services spanning 1st March 2021?

For services spanning 1st March 2021, the treatment will depend on the ‘tax point’ of the services.  This is the earlier of:

• Date of issue of the VAT invoice; and
• Date of payment

Where the tax point is before 1st March 2021 the normal rules will apply.  Where the tax point is on or after 1st March 2021 then the Reverse Charge will apply.

How should the Reverse Charge be shown on invoices?

Supplier

The invoice will show the sale without VAT and wording will need to be added to highlight that the sale is under the Reverse Charge such as:

‘Reverse charge: Customer to pay the VAT to HMRC’

HMRC has other examples of acceptable wording to include on your invoice.

You will also have to show the VAT rate applicable to sale on the invoice.
 

How do you complete a Reverse Charge VAT return?

Supplier

The sale will be entered in box 6 of the return. No output VAT will be charged or shown in box 1 of the VAT return.

Customer

The customer will have two entries to include on their VAT return:

1. Deemed output VAT will be accounted for on the value of the invoice and added to box 1 of the VAT return (nothing will be entered in box 6 for the transaction)
2. The value of the invoice will be entered in box 7, as a normal purchase would be. Deemed input VAT will also be accounted for and added to box 4

The value added to boxes 1 and 4 will be the same, so there should be no overall impact to the customer’s VAT liability.

Is there anything I should do to prepare for the Reverse Charge?

• Make sure that your bookkeeping software can cope with Reverse Charge transactions. And remember, your business may be both a customer and supplier of construction services at times.
• If you’re a supplier and affected by the Reverse Charge, make sure your invoice complies with the new rules
• In order to check whether the Reverse Charge applies or not, HMRC recommend that suppliers check the VAT and CIS status of their customers
• If you believe you are an ‘end user’, you may need to provide evidence to the construction business supplying you with services to support that. It’s good practice to have this documented in writing between both parties

How TaxAssist Accountants can help

We would be happy to discuss your affairs in more detail and can look after your bookkeeping needs and/ or complete your VAT return for you.

Our software is compliant with Making Tax Digital. We can also look after your CIS returns to HMRC and supply payment and deductions statements to your subcontractors.  

Date published 27 Jun 2019 | Last updated 3 Mar 2021

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.