1. What is it?
The VAT domestic reverse charge for building and construction services is a change in how VAT is handled for certain kinds of construction services in the UK, along with the building and construction materials used directly in those services (although it doesn’t apply to building and construction materials supplied separately and independently of any construction services).
The VAT reverse charge for construction is effectively an extension of the Construction Industry Scheme(CIS) and applies only to transactions between VAT-registered contractors and sub-contractors who are registered for the CIS. If that's not you, read no further!
The scheme means that those supplying construction services to a VAT-registered customer will no longer have to account for the VAT. Instead, the customer will account for the VAT (that is, it will be considered input tax for them, as if they’ve made the supply to themselves).
In simple terms, sub-contractors will require the contractor employing them to handle and pay the VAT directly to HMRC for services they provide.
2. When is it being introduced?
The VAT domestic reverse charge was originally scheduled for October 2019, but has recently been delayed to 1 October 2020.
When you first apply it will depend on when the tax point is, (i.e. the date of issue of the VAT invoice, or the receipt of payment – whichever occurs first). If the tax point is on or after 1 October 2020 then the reverse charge should be applied. If the tax point is before that date, current VAT rules apply.
3. Who does it affect?
HMRC says the VAT reverse charge for construction doesn’t apply to sub-contractors unless the answer to all of the following questions is "yes":
- Are any of the supplies you are making within the cope of the CIS?
- Is the supply standard or reduced-rated?
- Is your customer VAT registered?
- Will your payment be reported under CIS?
- Are you sure the customer is not an end user?
The scheme applies to VAT-registered businesses who are registered with the CIS, and use the CIS to report payments. If your CIS business is the recipient of construction services, and receives an invoice with the reverse charge applied, then you account for the VAT amount as part of your overall input tax, as if you’ve charged it to yourself.
If your business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply for the supplier (so they will charge you the VAT and account for it as usual). If you’re not VAT registered, you should make it clear to the supplier in writing. Reverse charges do not contribute to a company’s potential VAT threshold. So if you aren’t registered for VAT then any attempt to apply the reverse charge will not push you over the limit.
The reverse charge also doesn’t apply to end users, such as the people who use a building that’s been constructed by the provided services, and nor does it apply to some of those connected to them, such as landlords or tenants.
4. Where do I find out more?
HMRC have a lot more detail on their web page - just click here.