VAT reverse charge for construction

What is a domestic reverse charge?

Domestic reverse charge, is a mechanism designed to prevent trader fraud because it makes the customer responsible to account for the VAT and thus leaves no window for the supplier to go missing without declaring and paying the VAT to the HMRC.

In simpler words, domestic reverse charge is a process in which VAT is charged by the customer themselves instead of the supplier. Domestic reverse charge is only applicable to supply of certain or specified construction services to other businesses in the construction sector.

Also Read: Why should I register for VAT

When you must use the reverse charge?

Applicable domestic reverse charges on services falling under the construction industry scheme are as follows -

1. Construction, alteration, repair or extension, demolition/dismantling of permanent/temporary buildings, including offshore installations.
2. Decoration of internal or external surfaces of any building or structure.
3. Internal cleaning of the buildings. However, the cleaning done during the period of their construction, alteration, repair, extension or restoration will only be counted or considered.
4. Installation of heating systems, lighting, ventilation, air-conditioning, power supply, drainage, sanitation, water supply or fire protection.
5. All services which are integral part of construction such as clearance of the site, boring and tunnelling, earthmoving, excavation, site restoration, erection of scaffolding, landscaping, provision of roadways etc.

Which VAT rates are affected by the reverse charge on construction services?

The reverse charge applies to construction services subject to the standard and reduced VAT rates.The VAT reverse charge will not apply to zero-rated services such as the construction of new dwellings.

What’s exempt from the VAT reverse charge for construction services?

Construction services on which reverse charge is not applicable, such as:

1. Extraction of natural gas or oil.
2. Extraction of minerals.
3. Construction of underground works for extraction of oil or natural gas/minerals.
4. Manufacture of components for the installation of heating systems, lighting, air-conditioning, ventilation, drainage, sanitation or power supply.
5. Engineering interior or exterior decoration.
6. Installation of seating, blinds and shutters.
7. Installation of security systems such as burglar alarms, closed circuit television or public address systems.
8. Specified construction services which are not used to make an onward supply of construction services.

Also Read: Pros and cons of VAT registration

Domestic reverse charge invoices

Service invoices that are inclusive of domestic reverse charge must include all the information necessary for a standard VAT invoice. This includes the amount of VAT due under the reverse charge or the VAT rate in case the VAT amount cannot be displayed. However, they must make clarify that the reverse charge is applicable and the consumer is responsible for VAT.

Impact on construction businesses

It is advised that construction businesses to make sure their accounting systems can handle reverse charge supplies and conduct continuing inspections to verify supplies and purchases are handled correctly. Due to the requirement to specify the VAT amount on domestic reverse charge invoices, there is a possibility of the risk that suppliers will show incorrect VAT to HMRC, and customers will recover the same from them.

Subcontractors that used VAT collected from their customers as working capital until they were required to submit it to HMRC are likely to face cash flow problems. These businesses, as well as their consumers, should assess if payment terms should be revised to avoid supply chain problems.

What kind of action should construction businesses take?

Businesses engaged in construction should:

1. Conduct a review of supplies made to and received from other VAT-registered contractors to determine which are subject to a reverse charge effective 1 March 2021.
2. Consider the cash flow impact after 1 March 2021 and whether other mitigation measures are available.
3. Obtain notification from consumers that they are end-users, as well as confirmation over their VAT registration and CIS status. Clients who do not provide information that they are end-users must be considered as though they are not.
4. Consider if it is necessary to switch to monthly VAT returns if you are no longer a net VAT payer.
5. Learn more about the practical steps you can take.
6. Evaluate the flat rate scheme's suitability for your business.
7. Put an end to the cash accounting scheme in case supplies are covered by the DRC.
8. Consider whether it is suitable for you to make an arrangement for suppliers to purchase goods & materials that fall under the DRC so that you can avoid the need to fund VAT payments for goods and materials.

Conclusion

1. You should familiarise yourself with what is included and what's not in the VAT reverse charge today and engage with any contractors who use you regularly to ensure they are also aware of the requirement.
2. As a contractor, you should contact your regular subcontractors and discuss the situation with them (if you haven't already).
3. The reverse charge must be specified in any contracts. You must also ensure that your IT systems are fully prepared, including that your accounting system can process reverse charge invoices.

Consult a dns VAT consultant now to know how to proceed with the VAT reverse charge.

If you have questions regarding the VAT reversal charge, please speak to one of our dns experts right now on 03330 886 686, or you can also e-mail us at enquiry@dnsaccountants.co.uk.

Disclaimer :- "This article was correct at the date of publication. It is intended for general purposes only and does not constitute legal or professional advice. Independent professional advice should be sought before proceeding with any transaction".

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.