A major change to the way VAT is collected in the building and construction industry comes into force on 1 October 2020
The domestic reverse charge VAT for construction services will put the onus on the customer receiving a service to pay the VAT element to HMRC, instead of paying the supplier. It will apply to VAT-registered individuals or firms in the UK, who supply specific services under the construction industry scheme.
HMRC has urged those set to be affected by the change to get their houses in order over the coming weeks. If affected you should check whether the reverse charge will affect sales, purchases or both, and tell clients or suppliers of the measure.
HMRC has also advised those affected to update their accounting systems to handle the change and consider cashflow impacts. The domestic reverse charge has been introduced to combat missing trader fraud in the construction sector.
So, who’s affected?
- The Reverse Charge will apply to any ‘construction services’ supplied, and any goods supplied in conjunction with them.
- The legislation impacts business’ registered as contractors to work in the construction industry service, and end recipients of the services.
- The services to which the reverse charge applies (e.g. construction, installation etc.) are detailed on HMRCs website https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services
The legislation does not apply to:
- Zero-rated supplies of construction services
- The supply of solely goods
- Supplies of specified services where the supplier and customer are connected in any way, and for suppliers between landlords and tenants.
- Suppliers of specified services overseas (The Construction Industry Scheme legislation is concerned with the domestic supply of services only)
- Where the recipient is not going to be making an onward supply of construction services
Rather than the supplier charging and accounting for the VAT, the end recipient of those supplies, governed by the Construction Industry Scheme accounts for the VAT.
Here’s how it works in practice.
The supplier will need to issue VAT invoices that clearly indicate the supplies are subject to the domestic reverse charge and that the customer is required to account for the VAT. The VAT due should be clearly stated however should not be included in the amount shown as total amount charged.
Completion of the VAT Return (Suppliers)
Suppliers of goods or services under the domestic reverse charge must not enter in Box 1 of the VAT Return any output tax on sales to which the domestic reverse charge applies but must enter the value of such sales in Box 6.
If the recipient/customer is VAT registered, must then account for the VAT due on that supply via its VAT return at the appropriate rate, instead of paying the VAT to the supplier. The recipient may recover the VAT amount as a input tax, subject to the normal rules – this would normally mean a ‘nil net’ tax position with no VAT being due to HMRC.
Completion of the VAT Return (Customers)
Customers must enter in box 1 of the VAT Return the output tax on purchases to which the domestic reverse charge applies but must not enter the value of such purchases in Box 6. They may reclaim the input tax on their domestic reverse charge purchases in Box 4 of the VAT Return and include the value of the purchases in Box 7, in the normal way.
Additional points of note:
- The legislation stipulates that if there is a reverse charge climate in a supply then the whole supply will be subject to reverse charge if the parties agree it will also cover the provision of construction services that includes materials.
- There is no minimum threshold from which the reverse charge would apply.
Please see the flowchart which explains how to decide whether to apply normal VAT or apply the domestic reverse charge.
Please do get in touch with your usual contact for further advice on Reverse Charge VAT.