VAT Reverse Charge for the Construction Industry

From 1 March 2021 new VAT rules come into force in the construction industry. These rules were originally intended to come in on 1 October 2020 and 1 October 2019 but were delayed by HMRC. The rules, as always, are quite complex but we set out an overview below which should hopefully provide you with enough information to decide if the regulations apply to your business and what to do if they do apply:

1. The Services that the new rules relate to–under the Construction Industry Scheme (CIS) will be subject to the domestic reverse charge for VAT but only if it is made to a customer who is VAT registered and who is not an end user.

2. Specified construction services – Supplies of the following services will be specifically subject to the domestic reverse charge:

• 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, draining, 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, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

The service will not be subject to the domestic reverse charge if it supplied to an end user.

3. What to do if the new rules apply to you:

If the rules apply to a service that you are providing then you must

• Not charge VAT
• State on the invoice that the supply is subject to the reverse charge
• Enter the net value of the invoice in box 6 of your VAT return. No VAT should be entered into box 1.

If the rules apply to a service that you are receiving then:

• The output tax should be entered in box 1 of the VAT return. No corresponding net figure should be entered in box 6
• The VAT is entered as input VAT in box 4 of the VAT return and the net value of the purchase is entered in box 7 of the return.

What you should do now

1. Check whether the reverse charge affects either your sales, purchases or both

2. Make sure your accounting systems and software are updated to deal with the reverse charge

3. If you are a contractor you will need to review all your contracts with subcontractors to decide if the reverse charge will apply to the services you receive. You will need to notify your subcontractors if it will

4. If you are a contractor you will need to contact your customers to get confirmation from them if the reverse charge will apply.

If the reverse charge does not apply to a service that you are providing, then normal VAT rules apply. One of the complications of the regulations is that the reverse charge may apply to a service that you provide to one customer but not to another customer, even though it is essentially the same service.

If any of the services in a supply are subject to the reverse charge then all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it and the same applies to materials (unlike CIS deductions which do not apply to materials).

Click here to see a flowchart which should help you to decide when and where the reverse charge may apply to you.