VAT Reverse Charge for Construction – what does it mean for you?

If you work in building and construction, you need to be aware of the new VAT reverse charge starting in March 2021.

What is the VAT reverse charge?

Construction firms currently pay VAT directly to HMRC on any construction services or materials they’ve provided. But from March, VAT payment becomes the responsibility of the person or company who buys the building service (provided they are not the end user).

Why is it being brought in?

VAT fraud has been a big issue in the construction sector for years, and the new measures are designed to stop this. They will also help businesses become more VAT compliant and, for many, it will also boost their cashflow.

The VAT reverse charge has been delayed twice – from October 2019 and then October 2020. The government felt firms wouldn’t be ready because of Brexit and the pandemic.

Who does it affect?

The change will impact VAT-registered businesses that are part of the UK Construction Industry Scheme (CIS). The reverse charge is due when all of the following conditions apply:

  • Construction services and/or materials attracting VAT are supplied to a UK-based customer
  • Both the customer and the supplier are VAT and CIS registered
  • The work or materials attract the standard (or reduced) VAT rate
  • The customer and supplier are not linked or connected in any way
  • The customer is not an end user

Does the VAT reverse charge apply to work done on a private home?

No. It only applies to businesses that are both VAT registered and part of the CIS. For a normal domestic project like an extension, standard VAT rules apply.

What kinds of building services come under the VAT reverse charge?

The VAT reverse charge will apply to services including:

  • Site clearance
  • Installing air conditioning, heating or lighting systems, ventilation systems, fire protection, power or water supplies, drainage or sanitation
  • Works and/or maintenance relating to roadworks, walls, docks and harbours, railways or aircraft runways
  • Earth-moving excavation
  • Building, repairing, extending, altering or demolishing any structure
  • Works and/or maintenance relating to sewers, wells, water mains, land drainage installations, inland waterways, pipelines, reservoirs, coast protection or defence
  • External or internal painting and/or decorating of any structural or building surfaces
  • Any works and/or maintenance relating to power lines or electronic communications equipment
  • Internal cleaning of buildings and structures as part of a restoration project, construction, extension, alteration or repair.
  • The VAT reverse charge also applies to any construction materials if used directly for the services being sold – which is an important difference between this and the CIS scheme.

A full list is available on the HMRC website.

What services are exempt from the VAT reverse charge?

Some of the exclusions listed by HMRC include:

  • Drilling for oil/gas
  • Underground works – tunnelling or mineral extraction
  • Manufacturing building or engineering equipment
  • Manufacturing components for heating, lighting, ait conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
  • Delivering the manufactured items above to site
  • Professional consultancy from architects, surveyors, building consultants, engineers, landscapers or decorators
  • Artistic works
  • Signage
  • Installation of seating, blinds and shutters
  • Installation of security systems

What if the job involves services where the VAT reverse charge only applies to some of the work?

The VAT reverse charge system is meant to be simple. If you have a situation where some of the work/materials are eligible but others aren’t, treat the whole invoice as reverse chargeable. Businesses are not expected to separate them out.

What if I’m a subcontractor?

If you’re a CIS-registered contractor and the rules above are met, VAT should not be included on your invoices. The invoice must make the customer aware that the VAT reverse charge applies, and at what rate (usually the standard 20%). Customers then include this VAT amount on their VAT return.

How does it work for main contractors?

A main contractor receiving a subcontractor’s VAT reverse charge invoice should account for it as an expense invoice in the normal way. They should include input VAT on their VAT return and make an allowance for the reverse charge, which should be shown clearly on the subcontractor’s invoice.

In effect, the two balance each other out; the output VAT is covered by the input VAT, so there’s no effect on a contractor’s VAT liability.

What should I do if I’m not sure whether the VAT reverse charge applies to my services?

It’s best to seek professional guidance. Speak to a VAT specialist or directly to HMRC.

What happens if people don’t comply?

While HMRC has said it will give businesses some leeway in the first six months, it’s expected to come down hard on those who don’t adhere to the new system. So make sure you understand your responsibilities – or contact us for advice. You can also find helpful guidelines on the HMRC website.

Talk to us for advice

Thobani Accountants in Peterborough supports many clients in the construction sector with VAT Return Services. We work with both contractors and subcontractors to provide accountancy services and packages. Get in touch for help today.