FROM 1 OCTOBER 2019, construction industry contractors and sub-contractors will have to treat and pay VAT in a different way following the introduction of the new VAT domestic reverse charge (VRC) for building and construction services system. It applies only to companies that are both VAT registered and CIS registered companies.
The new, mandatory system is being introduced to help combat tax fraud.
The VRC changes how VAT is handled for construction services in the UK supplied by CIS-registered companies, as well as the construction materials used directly in supplying those services (not building and construction materials supplied separately and independently of any construction services).
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).
For sub-contractors supplying services, they will require the contractor employing them to handle and pay the VAT directly to HMRC. They will show VAT in their invoice to their customer, but it is the customer who will pay VAT to HMRC.
The payment the sub-contractor receives will be for the cost of the work done (plus materials used) only.
Sub-contractors whose construction project begins before the reverse charge, but ends after it comes in will apply the reverse charge according to the date of the VAT invoice, or the receipt of payment – whichever occurs first. So, if the date of invoice (or payment) is on or after 1 October 2019 then the reverse charge should be applied. If the tax point is before that date, current VAT rules apply.
The VRC applies to both standard and reduced-rate VAT supplies. It doesn’t apply to zero-rated supplies.
If your business is not VAT registered then the reverse charge cannot be applied to you, and standard VAT rules apply. So, as a sub-contractor you should charge and pay VAT to the taxman as usual. If you’re not VAT registered, you should make it clear to your customer (and any suppliers) 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.
Building owners and landlords
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.
The VRC Acid Test
HMRC says the VAT reverse charge for construction doesn’t apply to sub-contractors unless you can answer yes to all of the following questions:
- Are any of the supplies you are making within the scope 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?
Applicable construction services
HMRC says the reverse charge applies to any services that form an integral part of the list below, or are preparatory to them, or are for rendering them complete (for example, site clearance or earth-moving excavation):
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
- construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- 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 internal or external surfaces of any building or structure
Remember that the reverse charge applies to the services listed above plus any construction materials used directly for those services.
Exempt VAT reverse charge construction services
HMRC lists some examples of exclusions if they’re supplied on their own, although the list isn’t exhaustive:
- drilling for, or extraction of, oil or natural gas
- extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying out of landscape
- the making, installation and repair of artistic works, being sculptures, murals and other works that are wholly artistic in nature
- sign writing and erecting, installing and repairing signboards and advertisements
- the installation of seating, blinds and shutters
- the installation of security systems, including burglar alarms, CCTV and public address systems
If you’re a sub-contractor supplying CIS-regulated construction services when you issue your VAT invoice you will be passing on the VAT charge to your customer. Instead of collecting the VAT and paying it to the taxman, the customer will have to make those payments, so it should save you some work and make your accounts easier.
But it might affect your cash flow because the VAT you previously held before passing it monthly/quarterly to HMRC as a payment will no longer be available for any uses you might have put it to.
And, because you no longer pay VAT on your sales you might find you become what HMRC calls a repayment trader—a business whose VAT Return means they claim money from HRMC, rather than making a payment.
HMRC suggests that such businesses apply to move to monthly returns, to speed up payments received from HMRC and improve your cash flow.
However, timing could be important because delaying switching to monthly returns following the 1 October 2019 start date for the reverse charge will offset the VAT payable for construction projects spanning 1 October.
Switching to December would mean October and November become a two-month VAT Return period, for example. Contact HMRC to seek advice, or speak to an accountant/VAT specialist.
The VRC does not apply to domestic customers, only CIS-registered, VAT-registered customers.
If you’re a contractor (i.e. purchase CIS regulated construction services) then, in theory, it means you need to ensure that when you receive reverse charge VAT invoices you correctly account for them.
This could improve cash flow because the VAT you previously had to pay when paying sub-contractors, but could not reclaim until your next VAT return, is simply netted off in your VAT return. There should be no net impact on your overall VAT bill.
However, to ensure you don’t pay too much or too little VAT you will need to ensure the invoice you receive is correct, especially with regard to the correct VAT rates, and you’ll need to ensure the services listed are eligible for the reverse charge.
If you invoice for mixed supplies, the VAT reverse charge applies to the whole invoice. This is intended to make the system as simple as possible to administer.
The VRC is limited to UK companies providing construction services in the UK to VAT registered customers.
Invoices should clearly indicate the reverse charge applies. The invoice should have written on it.
Reverse charge: Customer to pay the VAT to HMRC
It should be clear on the invoice that the reverse charge mechanism has been applied but should still show all the usual information required for a VAT invoice.
Flat rate scheme
Reverse charge supplies are excluded from the flat rate scheme so should be accounted for and reported the same way that transactions are accounted for and reported under the standard scheme. You might need to reassess which of the standard or flat rate schemes are most beneficial to your business.