On the 1st March 2021, the UK Government finally introduced the VAT Domestic Reverse Charge for the construction industry, after long delays.
The changes that were introduced had a far-reaching impact on the construction industry, yet many small businesses, particularly those who may be a new start up, or who have previously only worked in the private sector, are unaware of the changes. There are a number of reports indicating that are larger businesses are simply ignoring the changes and are insistent on their subcontractors bending the rules, even when the work undertaken clearly falls outside of the scheme.
So, what is the VAT Domestic Reverse Charge?
As a VAT-registered business operating in the UK, you add the UK rate of VAT to your taxable sales, which is passed on to the customer. The customer pays the VAT as part of their invoice, and you pay what you collect to HM Revenue and Customs (HMRC) on your VAT return.
You also get to reclaim the VAT you pay to other businesses on taxable purchases (as long as they are not VAT exempt or out of the scope of VAT).
With the VAT domestic reverse charge, rather than collecting the VAT from the customer and paying it to HMRC on their behalf, the customer pays it directly to the government themselves. They may then recover the VAT amount as input tax, subject to the normal rules.
Who does the VAT Domestic Reverse Charge apply to?
The VAT reverse charge applies for standard and reduced-rate VAT specified services for VAT-registered individuals and businesses in the UK that operate within the Construction Industry Scheme (CIS). Simply, if you are a contractor that employs subcontractors or a subcontractor who is employed by contractors and you are signed up to CIS, the VAT domestic reverse charge will apply to you.
The charge does not apply to:
- Contractors/Subcontractors who are not VAT-registered
- Zero-Rated supplies
- Work completed outside of the UK
- Intermediary Suppliers
For reference, end-users are individuals or businesses who use construction services for themselves are do not sell the services as a part of a business. An intermediary supplier is defined as a VAT registered business connected to an end user.
When must I use the reverse charge?
You must use the reverse charge for the following services:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
When must I not use the reverse charge?
Do not use the charge for the following services, when supplied on their own:
- drilling for, or extracting, oil or natural gas
- extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
- manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
- the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
- making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements
- installing seating, blinds and shutters
- installing security systems, including burglar alarms, closed circuit television and public address systems
If you are a client of CMA Accountancy and have concerns regarding your handling of the VAT Domestic Reverse Charge rules, then please contact your client manager. If you are not a client here and need support then please contact us by giving us a call on 01257 255521 or completing the contact form on our website and we’ll get back to you!