Work in Construction? Are You Ready for the Domestic VAT Reverse Charge?
Making sense of VAT regulations is, for most businesses either a minefield or laboriously tiresome, or both! So, let’s see if we can help explain what the new Domestic VAT Reverse Charge means for you.
In essence if you work in the UK’s Construction industry, you need to be aware of the Governments’ VAT Domestic Reverse Charge for supplies of building and construction services, effective from 1 March 2021. Simply put, if you’re currently VAT registered in the UK, regardless of whether you are a sole trader or a Limited Company, the way your business accounts VAT is changing.
So, if you haven’t done so already, you’ll need to ensure that;
- Your accounting system and software is able to deal with the VAT Domestic Reverse Charge calculations
- Determine if and how the change may impact your cash flow
- Ensure that your staff who undertake your VAT accounting are familiar with the new reverse charge requirements.
What is the VAT Domestic Reverse Charge?
Its full title is the VAT Domestic Reverse Change for Building and Construction Services (a bit of a mouthful!) and is concerned with how VAT is handled for certain types of construction services within the UK. It is also important to note, that it is also applicable for the building and construction materials used directly within those services (but not if they are supplied separately from the actual services).
It is essentially an extension of the Construction Industry Scheme (CIS) and applies to transactions that are reported under the CIS and occur between VAT-registered contractors and sub-contractors. HMRC has a couple of useful flowcharts that can help you to decide if the reverse charge applies or not, so they are worth checking out.
How does the VAT Domestic Reverse Charge Work?
If you supply construction services to a VAT-registered customer you will no longer have to account for the VAT, instead the customer will now account for the VAT. When it comes to supplying services, sub-contractors will require their contractor (employer) to handle the VAT and pay it directly to HMRC.
The payment that you will receive will be for the cost of the services undertaken (including any materials used), net of any CIS deductions for Tax and NI, but no VAT will appear on the invoice to be paid.
(Invoices should though show that Domestic Recharge VAT applies and what the VAT charge should have been. The customer is then responsible for notifying HMRC of this amount, however, the VAT amount is not included in the invoice total).
Why is a VAT Domestic Reverse Charge being Introduced?
It’s being introduced by HMRC in a bid to combat fraud within the construction industry. Unfortunately, it seems that some construction businesses charge VAT for the services supplied but then mimic the Scarlet Pimpernel and disappear without paying their bill. In essence they are making an additional 5% or 20% profit and the buying company still recovers their Purchase VAT, meaning the HMRC loses out on VAT reclaimed by the contractor - not very fair or ethical!
HMRC are moving the VAT charge down the supply chain to stop these organised criminals.
What Services Does the VAT Domestic Reverse Change Apply to?
According to HMRC VAT Domestic Reverse Charge applies to;
- 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, drainage, 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, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
What Services are Exempt?
HMRC lists the following services that are exempt from the charge, when supplied on their own:
- Drilling for, or extracting, oil or natural gas
- Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
- The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
- Making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
So, What if I’m a;
Very little change because when you issue your VAT invoice you will pass on the VAT charge as normal. However, you will have to amend the way in which you reconcile customer payments against invoices issued as VAT-registered customers will be with holding the VAT for CIS related supplies. Maybe it’s time to check that your accounting software needs updating? On your VAT return you mustn’t enter in Box 1 any output tax on sales to which the Domestic Reverse Charge applies, but enter the value of these sales in Box 6 instead.
You must ensure that when you receive reverse charge VAT invoices you account for them correctly. You will need to pay HMRC directly any VAT due as part of your normal VAT settlement process, instead of paying VAT on CIS related supplies to your supplier. Again, it’s time to consider if your accounting software can provide this function? On your VAT return, enter the output tax on purchases which the reverse charge applies in Box 1, do not enter in Box 6.
The input tax for the purchase is entered in Box 4 and the net value of the purchase is entered in Box 7 as normal. This process is often referred to as Notional VAT as the VAT itself is not actually charged, but implied as part of the transaction.
Take the time to ensure sure that you are ahead of the game;
- Review the supplies that you supply and receive from other VAT-registered companies to determine if the reverse charge will apply.
- Ask customers if they are an end user and obtain confirmation of their VAT registration and CIS status.
- Review and update your accounting system and software to cope with the changes.
- Consider any impact that may occur on your cash flow and implement a plan.
- Move to monthly VAT returns if you are no longer a payer of VAT.
- Withdraw from the Cash Accounting Scheme if your supplies fall under the Domestic Reverse Charge. (N.B. you can still process using the VAT Cash Accounting Scheme, however any invoices where Domestic Recharge VAT applies must be included on the VAT return. This is applied automatically in some software. Other VAT Schemes may need further consideration, for example, if you currently use the Flat Rate Scheme, it may be worth considering a switch to Standard VAT).
If you find that your accounting software isn’t fit for purpose with the implementation of the VAT Domestic Reverse Charge or you require some training, then give the team at Advantage Services a call on 0330 335 0011 or email email@example.com.