This week, the domestic VAT reverse charge for building and construction services kicked in.
If you work in the construction industry, you’ve probably heard about this change already – it’s been in the pipeline for a few years now, and has been delayed twice due to Brexit and COVID.
But from 1 March 2021, it applies to specified building and construction services that are reported under the construction industry scheme (CIS).
The charge doesn’t apply to every transaction in the construction industry, however, and you may well be exempt as a property developer.
Read on for more information on how the charge works and who it applies to, or contact us if you’re not sure whether it affects you.
What is the domestic reverse charge?
The reverse charge is an anti-fraud measure, designed to prevent criminal activity in the construction industry, where suppliers charge VAT on their invoices with no intention of paying it to HMRC.
It requires suppliers to notify their customers that the charge applies and include the amount of VAT due on their invoice. Customers then need to report the VAT due in their next return.
This could have knock-on cashflow impacts for subcontractors, as it takes away the additional cash they would have had in between charging for their service and paying their next VAT bill.
Are you an end user or intermediary supplier?
As a property developer, you might be classed as an end user or intermediary supplier.
End users are people or businesses that are VAT and CIS-registered, but do not make onward supplies of the building and construction services they buy.
Intermediary suppliers are people or businesses that are ‘connected or linked’ to end users. This means they either have a relevant interest in the land where the construction works are taking place – such as a landlord and a tenant – or they’re part of the same corporate group.
They’re treated as if they are end users if they buy construction services and re-supply them to a connected or linked end user with no material alterations.
If either of these statuses apply, you’ll need to notify your supplier or building contractor so they know not to use the charge.
If you do make onward supplies – for example, if you sell a property that’s under construction to an investor – the charge might apply.
Bear in mind that this status can change during an ongoing project, so you should always be conscious of whether you’re classed as an end user, intermediary supplier, or something else.
Which services does the reverse charge apply to?
The reverse charge needs to be used for standard and reduced-rate VAT services that are supplied to VAT-registered individuals or businesses, and are reported under the CIS.
The services that come under the charge include constructing, altering, repairing, extending, demolishing or dismantling buildings or structures.
It also applies to the installation of internal systems like heating, lighting, air-conditioning, ventilation, power and so on, as well as cleaning, painting or decorating as part of the construction process.
It doesn’t apply to every service, however. The work of architects or surveyors isn’t subject to the charge, for example, and neither is that of building, engineering, decoration or landscaping consultants.
You don’t have to use the reverse charge for the installation of seating, blinds and shutters, or for security systems like burglar alarms or CCTV.
Purely artistic works like sculptures, murals and signboards aren’t included either.
You can find full lists of what is and isn’t included in the charge here.
Applying the VAT reverse charge
Anyone affected by the reverse charge will need to make sure their business and accounting systems are ready for the change.
If you’re using online accounting software like Xero, this will be a relatively simple job – just set your system up to apply the reverse charge, and it should make all the necessary adjustments to your invoices or VAT returns.
Make sure anyone in your team who is responsible for VAT accounting is also aware of the change, and can manage the system correctly.
Finally, it’s important to think about any cashflow impacts the reverse charge might have.
This is something else online accounting software can help you with. By starting with accurate data collection and pulling that information through into long and short-term cashflow reports, your software should help you to assess how you might be affected by the VAT reverse charge, and what you can do to remain resilient to the change.
The new rules have already come into effect, but don’t panic if this is the first you’re hearing about it.
HMRC has said it “understands that implementing the reverse charge may cause some difficulties” and has reassured businesses it will apply a light touch to dealing with errors during the first six months of the new legislation.
As long as you are “trying to comply with the new legislation and have acted in good faith”, and have not deliberately avoided accounting for the charge correctly, you shouldn’t receive any penalties.
You can find more information on preparing for the VAT reverse charge on the Government’s technical guide.
Alternatively, contact us with any concerns you have and we’ll handle it on your behalf.
Get in touch for more information on the domestic VAT reverse charge for building and construction.