What Is The VAT Reverse Charge For The Construction Industry?
Are any of your clients in the construction industry? Make sure they’re aware of the new VAT reverse charge from March.
Combating fraud whilst boosting compliance (and cashflow)
From the 1st March 2021, the UK VAT 'reverse charge' will come into effect. The move will impact VAT-registered businesses in the Construction Industry Scheme (CIS).
VAT fraud has been a big issue in the building and construction sector for several years and the new measures are set to address this head on. It will also help companies become more VAT compliant whilst helping to boost their cashflow.
The VAT reverse charge was delayed from October 2019 and then again in October 2020 because of fears that firms wouldn’t be ready. Brexit and the pandemic have brought about the latest delay to March.
The VAT reverse charge in a nutshell
As things stand, construction firms must pay VAT directly to HMRC on any construction services or materials they have provided. However, after the 1st March payment of VAT will become the responsibility of the end-customer doing the purchasing.
What is the purpose behind the VAT reverse charge for the construction sector?
Over £100 million is lost to the UK Exchequer in VAT fraud every year which is clearly unsustainable. The main culprits are organised criminals, attracted by an additional 5% or 20% profit that isn’t rightfully theirs.
Reverse charge schemes are already found in other sectors and are not a new concept. Businesses such as computer chip and mobile phone retailers, as well as wholesale energy suppliers, have been subject to the VAT reverse charge for some time already.
As things currently stand, unscrupulous business owners have been charging customers VAT only to then disappear without paying their VAT bill. The reverse charge measure serves to put the liability for VAT further down the supply chain, making it impossible for this kind of fraud to occur.
How will the VAT reverse charge work?
The new measure only affects UK companies undertaking construction services in the UK. The reverse charge will need to be applied when each of the conditions below are met:
- The work or materials attract the standard (or reduced) VAT rate
- The customer and the supplier are not linked or connected in any way
- Both the customer and the supplier are VAT and CIS registered
- Construction services and/or materials attracting VAT have been supplied to a UK-based end customer
What kinds of activities will come under the VAT reverse charge?
The VAT reverse charge will apply where any applicable work and/or preparatory services have been provided. These services include:
- Site clearance
- The installation in any building or structure of air conditioning, heating or lighting systems, ventilation systems, fire protection, power or water supplies, drainage or sanitation
- Any works and/or maintenance pertaining to roadworks, walls, docks and harbours, railways or aircraft runways
- Earth-moving excavation
- Building, repairing, extending, altering or demolishing any structure, including those installed offshore, whether permanent or not
- Any works and/or maintenance relating to sewers, wells, water mains, land drainage installations, inland waterways, pipelines, reservoirs, coast protection or defence
- External or internal painting and/or decorating of any structural or building surfaces
- Any works and/or maintenance relating to power lines or electronic communications apparatus
- Internal cleaning of buildings and structures as part of a restoration project, construction, extension, alteration or repair.
The VAT reverse charge also applies to any construction materials which is an importance difference between this and the CIS scheme.
What about invoices for mixed supplies, meaning the VAT reverse charge only partially applies?
The VAT reverse charge system is meant to be simple. So if there’s a scenario where only some of the work/materials are eligible for the reverse charge, the whole invoice should be treated as such. Businesses are not expected to separate them out.
Are there times when the reverse charge does not apply?
Yes. The VAT reverse charge will not apply if the supplier and the customer are linked or connected in some way. It also won’t apply if the work or supplies are not covered by the CIS, or are not subject to VAT at all.
A note for subcontractors
When a subcontractor sends an invoice for work or materials, VAT should either be charged as usual if the new rule doesn’t apply, or be covered under the reverse charge. If it’s the latter, VAT should not be included on the invoice
One of the vital points that the VAT reverse charge mechanism is based on is transparency. Every subcontractor’s invoice must make the customer aware of the VAT status by clearly showing if the VAT reverse charge applies. The invoice must also display which VAT rate is being applied (usually the standard 20%).
It is essential that customers then include on their VAT return the applicable VAT amount. Only customers (or contractors) are required to do this - subcontractors do not need to include the reverse charge on their own VAT returns.
And main contractors?
Main contractors in receipt of a subcontractor’s VAT reverse charge invoice should account for it as an expense invoice in the normal way. Therefore, on their VAT return they should include input VAT. They must also make an allowance for the reverse charge, which should be shown clearly on the subcontractor’s invoice.
The two in effect balance out; output VAT is covered by the input VAT. So in practice, there’s no effect on a contractor’s VAT liability.
Harsh penalties for non-compliance
HMRC has indicated it will go lightly on businesses during the first six months while the new rules bed in. However, after that it’s expected to come down hard on those who don’t adhere to the measures properly.
Don’t let your construction clients slip through the net. Government guidance is available on this topic with regular updates expected.
This article was put together by the R&D tax and funding specialists at Myriad Associates.
Find out if your clients could claim R&D Tax Credits for their innovative projects today. In fact, there are many different R&D activities within the construction sector that will qualify for the relief.
Also, discover how we work with accountancy firms across the country in achieving the vital R&D funding their clients are owed.
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