VAT Reverse Charge for the Construction Industry
From the 1st March 2021 the VAT reverse charge will need to be used for most supplies of building and construction services.
This aimed at sub-contractors to main contractors. No VAT will be charged by the sub-contractors. The main contractor will account for output VAT on the value of the supply made by the sub-contractors. This VAT will normally be reclaimed within the same VAT period by the main contractor thereby there should be no net effect.
The reverse charge is intended to cover labour and not building materials.
The charge applies to VAT registered businesses (including those that should be registered for VAT) that report within the Construction Industry Scheme for standard and reduced VAT rates- it does not apply to zero rated supplies. For a detailed list of what services are included to account for the VAT reverse charge please see the following link https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse
Supplying building and construction services
If you supply building and construction services and are registered for VAT in the UK you will need to check the following:
- Check your customer has a valid VAT number
- Check your customer’s CIS registration
- Review your contracts to decide if the VAT reverse charge applies and tell your customer
Gain evidence either in a letter, email, or within the contract of confirmation (the notification) if your customer is an end user or intermediary supplier (an intermediary supplier is someone who makes an onward supply of the same building work to an expected end user with whom they are connected, or someone making an onward supply of the same building work to an expected end user, where both have an interest in the property, such as a landlord and tenant). If you often deal with end users and intermediary suppliers but the customer, upon request has not provided written confirmation of their end user or intermediary status then you must assume the VAT reverse charge applies and not charge VAT unless notified by the customer.
It is strongly recommended that the suggested notification as provided by HMRC is used. This will help to avoid any possible disputes later on. The suggested wording is:
‘We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.’
We would also strongly recommend to avoid confusion that the name and address of the property are also contained within the notification.
An end user is a business that is VAT and CIS registered but does not make onward supplies of the building and construction services supplied to them. Please see the following link for more details on end users and intermediary suppliers
Once you are satisfied the reverse charge applies then your accounting software should be set up so you can select this option and not charge VAT on the invoice.
VAT reverse charge also applies to services provided by labour only subcontractors where the subcontractor is responsible for the work completed and would ordinarily have charged VAT either at standard or reduced rates and is CIS registered.
When supplying an invoice subject to the VAT reverse charge scheme, suppliers should include the following:
- Show all the information on the invoice
- Make a note on the invoice to make it clear that the VAT reverse charge rules apply and the customer is responsible for accounting for the VAT.
- Clearly state how much VAT should be included under the VAT reverse charge, or if the amount cannot be shown then the VAT rate used. The VAT should not be included in the amount charged to the customer.
To see an example of an invoice with different VAT rates used please click here
Please note the text at the bottom of the invoice confirming it is the responsibility of the customer to report the VAT to HMRC on their VAT returns.
To help you decide if the reverse charge applies please see this flowchart
For supply and fix contracts (even if under two separate contracts) or there are separate invoices for the supply and fix, then the reverse charge will still apply unless the labour element overall is less than 5% of the value of the whole supply, or notification has been received from the customer. For supplies of spares after the completion of a supply and fix contract then these will also be treated as subject to the reverse charge unless the original contract did not provide for the supply of spares.
Buying building and construction services
If you buy building and construction services and are registered for VAT in the UK then you will need to check the following from your supplier:
- Check if your supplier has a valid VAT number
- Confirm in writing, email or within the contract with your supplier if you are an end user or intermediary supplier which confirms the reverse charge will not apply and VAT (at the standard or reduced rate) will be charged on the invoice. You will be able to account for the VAT in the usual way.
Completing your VAT return
VAT on sales
For providers of the reverse charge services you do not need to include any output tax however you should include the net sale in box 6
VAT on purchases
You must include the VAT amount in your box 1 figure but no net sale in box 6. You must then reclaim the reverse charge VAT using normal VAT rules in box 4 and 7.
The information above is an oversight of the implications of the new VAT reverse charge scheme, to find out more please either visit the HMRC website for more guidance https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services or contact your local Perrys office.
Author: Michelle Downs