New VAT reverse charge rules for the construction industry – are you ready?

04/02/2021

Quick read:

• HMRC’s VAT domestic reverse charge for construction services is due to come into force on 1 March 2021.
• The reverse charge will change the way VAT is collected in the building and construction industry.
• The new system is compulsory and will impact business who either supply or receive construction services.

New VAT reverse charge rules for the construction industry are set to come into force on 1 March 2021.

The last year has been challenging for many businesses, and the impact of the pandemic has been keenly felt by the construction industry. Despite these challenges it is important to keep on top of the incoming legislation. New VAT Reverse Charge rules, that have been delayed twice due to Brexit and the Coronavirus outbreak, will now be in force in little less than a month – are you ready?

What’s changed?

The new rules mean that it will become the responsibility of suppliers of construction services to account for the VAT that would have previously been charged by their subcontractors. The aim of the measures is to combat fraud in the sector as HMRC feel that many sub-contractors fail to pay the VAT they collect from their customers.

Who do the changes affect?

The answers to the following key questions determine whether the Reverse Charge rules apply to you:

• If you are VAT registered
• If you are registered for the Construction Industry Scheme (CIS)
• If the work carried out falls within the CIS scope
• If you are an ‘end user’ or ‘intermediary supplier’ for any of the work

If the answer is ‘yes’ to the first three questions and ‘no’ to the fourth, the invoices you raise will be subject to the reverse charge.

The reverse charge for builders will only apply to jobs that builders carry our for construction industry businesses who are making an onward supply of services to another person or business. This is likely in a typical subcontractor and contractor arrangement. For example, an electrician doing wiring in an office block where they invoice the main contractor and the main contractor invoices the office owner. In this case, the electrician’s sales invoice will be subject to the reverse charge, but the invoices issued by the main contractor to the office owner will charge 20% VAT in the normal way.

End users and intermediary suppliers

The reverse charge does not apply when your customer confirms they are either an ‘end user’ or ‘intermediary supplier’ for some or all of the work.

‘End users’ are customers that receive the supplies of construction but do not make an onward supply of construction services themselves (developers may be an example). For example, if work is carried out by a contractor at a construction company’s headquarters the construction company are the ‘end user’ and the contractor will invoice them in the usual way and add 20% VAT.

‘Intermediary supplier’ – if you are a business that is registered for both VAT and CIS that is connected to the end user. If both you and the end user are in the same corporate group or undertaking or if both entities have a relevant interest in the same land where the work is taking place, e.g. landlord and tenant.  Supplies received from other subcontractors will be subject to normal VAT rules rather than the reverse charge.

Areas to consider

Identification

The important change within the new version of the rules is that the onus is on the customer to identify themselves to the builder as the end user or intermediary supplier for the works. For builders selling services a cautious approach would be to include a statement in their contract as follows:

“We will assume you are an end user or intermediary supplier unless you notify us otherwise”

This wording is suggested by HMRC and the reverse charge is only applied if the customer says otherwise.

Note -If you buy construction services from other builders, you mustn’t accept an incorrect VAT charge where the reverse charge should apply. HMRC has the power to assess the VAT that should have been declared as output tax in Box 1 with the reverse charge. The buyer must revert to the seller for a VAT credit.

5% disregard

In some situations, some, but not all of the work invoiced will fall under the new rules. The latest guidelines confirm that normal invoicing rules will apply if reverse charge work is 5% or less than the total invoice value.

Cash flow challenges

If you sell reverse charge services you will no longer collect VAT from customers that can be used as working capital for up to three months until the VAT return is submitted and paid to HMRC.  From a practical perspective you may need to prepare for a cash-flow loss – will you require an increased bank overdraft?

If most or all of your work is likely to be subject to reverse charge, and you currently complete quarterly VAT returns, it may be worth considering monthly returns to help with cash flow.

Invoicing

If you sell services subject to the reverse charge you must include wording on each sales invoice along the lines of: ‘Reverse charge: customer to pay the VAT to HMRC’. The amount of VAT must be shown on the invoice as well, so the customer knows what to declare on their return.

From an accounting perspective, the issues are perhaps more practical in terms of changing accounting systems so that sub-contractors do not account for VAT, and the contractor’s systems account for the reverse charge.

To ensure your construction business is ready for the changes it is best to start planning now. Our team is on hand to help you prepare for the new VAT reverse charge.

For help and advice, get in touch with your usual WMT contact or Adrian Le Roux.