Since 1 March 2021, a domestic reverse charge for VAT purposes applies to most businesses buying and selling construction services.
Who is affected?
Businesses who are involved in the buying and selling of construction services.
When does it apply from?
The rules are effective as of 1 March 2021, however, transitional rules apply for determining when to apply the VAT reverse charge initially. This depends on the date the supply is entered into the businesses accounting system and the payment date as follows:
- If it was entered into the businesses accounting system before 1 March 2021 and is paid on or before 31 May 2021, normal VAT rules will apply.
- If it was entered into the businesses accounting system before 1 March 2021 but the payment date is on or after 1 June 2021, the domestic reverse charge will apply.
- If it was entered into the businesses accounting system after 1 March 2021, the domestic reverse charge will apply.
What has changed?
As of the implementation date, certain supplies of construction services will fall under the measure and will require the customer to account to HMRC for the VAT in respect of the transaction, rather than the usual position of the supplier accounting for the VAT.
Where VAT is due on a supply of construction services, which are within the scope of the Construction Industry Scheme (CIS), it will be subject to the domestic reverse charge by any customer who meets all of the following points:
- They are CIS registered
- They are registered for VAT
- They have not told the supplier that they are an ‘end user’ or ‘intermediary supplier’.
If any of the above points are not met, then normal VAT rules will apply.
The reverse charge will apply through the supply chain where payments are required to be reported through the CIS. The reverse charge will apply until the point in the supply chain where the customer receiving the supply is no longer a business that makes a supply of a specified service and is so deemed an end user.
Are there any exceptions?
The reverse charge will not apply to zero-rated supplies of construction services. Equally, it will not apply to businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land.
The reverse charge will also not apply to supplies of staff or workers but will apply to a supply of labour. The distinction between these is that, where the business supplying the labour will also be responsible for overseeing the work carried out, this will be a labour supply and subject to the reverse charge.
A large number of businesses (HMRC have estimated up to 150,000) are impacted by this change, and there have been significant administrative burdens placed on the sector as a result of these changes. Businesses should familiarise themselves with the new rules as soon as possible and make any updates to their accounting system, if they haven’t already, to allow reverse charge transactions to be identified, calculated, and reported.
Where a business is an end user it may need to tell its suppliers that it is an end user and, as such, the new reverse charge will not apply to them. This notification should be in writing e.g. by letter, email or as part of the contractual agreement. This notification should be kept as part of the normal business records and clearly show what supplies are covered.
If notification is not given, then the end user will be required to account for the VAT under the reverse charge mechanism. In some cases, the end user may want to treat the supply under the reverse charge and may therefore decide not to notify the contractor that they are an end user.
Of particular note for smaller businesses in the supply chain, the move to reverse charge accounting will mean they no longer collect the VAT due and hold it on account for HMRC. We are aware that the majority of SMEs see such tax collection as part of their working capital, and so the loss of this cash flow may cause some businesses pain following the implementation of the new rules. HMRC has allowed a long lead in time for this measure so as to allow these businesses time to build up cash reserves and prepare for the changes. However, affected businesses may wish to consider moving to monthly VAT returns if they find themselves in a VAT repayment situation.
When supplying a service that is subject to the construction industry reverse charge, the supplier must include the following:
- All standard information as normally required on a VAT invoice
- A note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for VAT
- No VAT should be charged on the invoice, but it should state how much VAT is due under the reverse charge, or the applicable VAT rate if the VAT amount cannot be shown.
Should you wish to read more on this subject, HMRC’s guidance note can be accessed here, which expands on the above notes.
Please direct any further queries on this update to a member of the Indirect Taxes team.