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In 2018, HMRC announced the introduction of a VAT domestic reverse charge to be applied to building and construction services. This was to be implemented from 1st October 2019, but was then delayed until 1st October 2020 and then again to 1st March 2021.

The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors.

The scheme means that those supplying construction services to a UK 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 considered input tax for them, as if they've made the supply to themselves).

This means that, for services provided, 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), net of any CIS deductions for tax and National Insurance but no VAT will be paid on the invoice.

HMRC are introducing this charge in an effort to combat fraud. Some construction businesses are deliberately set up to invoice for work, charging VAT and then disappear before the VAT collected is paid over to HMRC. The reverse charge scheme moves the VAT collection down the supply chain, making it harder to avoid payment.

The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are already required to be reported through the Construction Industry Scheme (CIS).

Therefore, supplies between sub-contractors and contractors, as defined by CIS, will be subject to the reverse charge unless they are supplied to a contractor who is an 'end user'.

An end user is one who will usually be a recipient who uses the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

The legislation also allows for those connected to end users, including landlords or tenants, to also be treated as end users. Intra-group and leasing re-charges of building and construction services connected to the end user are also excluded from the reverse charge.

If the end user does not provide its supplier with confirmation of its end user status it will still be responsible for accounting for the reverse charge and unable to reclaim input VAT. This could be expensive and therefore it is important to ensure that all paperwork connected with the reverse charge is promptly dealt with.

If the business is not VAT registered then the reverse charge cannot be applied and standard VAT rules apply for the supplier (so they will charge the VAT and account for it as usual).

If the business is not VAT registered, this should be made clear to the supplier in writing.

Crucially, reverse charges do not contribute to a company's potential VAT threshold. So if the business isn't registered for VAT then any attempt to apply the reverse charge will not push them over the VAT registration limit.

HMRC have stated that the VAT reverse charge for construction doesn't apply to sub-contractors unless the answer to all of the following questions is 'yes':

  • Are any of the supplies you are making within the scope of the CIS?
  • Is the supply standard or reduced-rated?
  • Is your customer VAT registered?
  • Will your payment be reported under CIS?
  • Are you sure the customer is not an end user?

If you are a subcontractor or a business involved in building and construction then the reverse charge VAT changes may affect you. Please contact us if you need any help or advice deciding if you are affected and what to do if you are.