Neil Warren shares the common questions answered by HMRC during a recent webinar concerning the reverse charge VAT rules for construction services.
2019 is proving to be a busy year for VAT, to say the least. The new reverse charge rules for construction services between builders (where the builder receiving the services makes an onward supply of those services to, say, a property owner) is the second major VAT challenge of 2019, following the introduction of MTD for VAT.
I recently listened to an impressive HMRC webinar about the new reverse charge rules that come into force on 1 October, which included some useful clarifications on some of the finer details posed by delegates during the session.
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What work is subject to the reverse charge?
Any work that is captured by the Construction Industry Scheme (CIS) is relevant for reverse charge purposes. Appendix A of the CIS guide CIS340 gives a comprehensive list of building work that is captured.
Neil’s comment: In the webinar, HMRC focused on one particular example of work excluded from the reverse charge rules, namely work on plant and machinery. For example, attending a property to repair a radiator is not classed as building work.
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Mixture of building work and non-building work
Shaun the subcontractor is a bit of an all-rounder. He undertakes two tasks for Bob the builder: repairing a radiator (not classed as building work) and painting window frames (definitely building work), and he issues one invoice for both jobs. In this situation, because some of the work is captured by the reverse charge rules (assuming Bob the builder makes an onward supply of the services, ie is not an end user), the reverse charge applies to the full value of the invoice.
Neil’s comment: This outcome might seem strange, but the HMRC presenter said it is to be done this way to avoid complications trying to split the invoice.
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Employment agency businesses
Employment agencies often supply labour-only builders to other builders, so why are they excluded from the reverse charge?
The challenge here is to look at what is being supplied by the employment business. As the builders will be working under the control and instruction of the builder customer this is deemed to be a supply of staff rather than building services. This is different to the situation where suppliers get on with jobs under their own banner, eg an instruction to rewire an office or decorate a room.
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Gross and net payments
Does the reverse charge apply to gross payments made under the CIS as well as to net payments (ie where income tax is deducted at source)?
The reverse charge applies to both. It is the nature of the work that counts and whether the builder customer is both VAT and CIS registered, not the payment arrangements.
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Period covering 1 October
What is the situation for work that spans the 1 October introduction date?
You need to look at the tax point date. In most cases, this will be the invoice or payment date, whichever is earlier. If this is on 1 October 2019 or later, the reverse charge will apply, subject to the other rules.
Subcontractor Steve receives an advance payment from Contractor Clive on 20 September 2019 for work to be carried out by Steve in October. Steve will raise an invoice once the work has been completed, on say 31 October. The tax point is the earlier payment date in September, so Steve should charge VAT to Clive and account for output tax in the normal way.
An important point emphasised in the webinar is that all builders affected by the new rules must consider the accounting mechanics in advance of 1 October.
- Will your accounting software deal with the invoicing needs of suppliers to include a comment about the reverse charge applying and the amount of VAT to be declared?
- Will the VAT amounts find their way to the relevant boxes on the return without manual intervention?
Comments below please.