VAT Construction Industry Domestic Reverse Charge

From 1 October 2019, under the new VAT domestic reverse charge in construction industry, the recipient of the services will need to account for VAT rather than the supplier.

The changes will be applied to construction services, including material only and labour only supplies. The reverse charge will not apply where:

  • Services are supplied to the end user, such as the property owner
  • Services are provided directly to a property developer that sells newly constructed buildings to the end user
  • The supplies are zero-rated
  • The supplier and recipient are landlord and tenant or vice versa

 

End User:

For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question.  However, they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.

 

To summarise HMRC’s latest guidance, issued on 25th June 2019:

  • The reverse charge will not apply to employment businesses that supply construction staff but NOT construction services.
  • The reverse charge will not apply to professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
  • Supply and fix works (e.g. a joiner constructing a staircase offsite then installing it onsite) will be subject to the reverse charge
  • Rather than checking each individual contract for reverse charge the business can do a volume or value test. If the contractor can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.
  • The subcontractors can move to monthly VAT returns, in order to recover input VAT quicker, as they will no longer have to account for output tax.
  • The subcontractors should consider whether special schemes like Cash Accounting or Flat Rate Scheme will still be beneficial.
  • HMRC will apply a gentle approach to deal with errors made in the first six months after the implementation, providing the business is trying to comply with the legislation and has acted in good faith.
  • The reverse charge will affect supplies of building and construction services supplied at the standard (20%) or reduced rates (5%) that also need to be reported under CIS.
  • The subcontractor should ask the customer if they are an end user or intermediary supplier and keep a record of the answer. If the end user does not provide its supplier with confirmation of its end user status, the end user will be responsible for accounting for the reverse charge.
  • When supplying a service subject to the domestic reverse charge, suppliers must:
    • Show all the information required on a VAT invoice
    • Make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT
    • Clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but that VAT should not be included in the amount charged to the customer

The new VAT Construction Industry Domestic Reverse Charge can appear complicated and we are organising VAT seminar on 12th September 2019 at our York office to discuss these changes in details.

 

For further information about the event or queries on the charge please contact our VAT team:

Naveen Sahney  01904 464 197   NSahney@garbutt-elliott.co.uk

Alex Millar 07483 066 752  Amillar@garbutt-elliott.co.uk