As of 1st October 2020, there will be a change to the way VAT is collected in the building and construction industry. The domestic reverse charge will mean that the customer receiving the services will now have to pay the VAT due to HMRC, instead of paying the supplier directly.
If you work in the construction industry and are registered under the construction industry scheme, you’ll likely be wondering what the new reverse VAT charge could mean for you and your business. Keep reading to find out all you need to know.
Why is the domestic reverse charge being brought in?
The domestic reverse charge has been developed in order to combat VAT fraud, which was particularly rife with large construction projects. The new system will shift the liability for accounting for VAT from the supplier to the customer, thus preventing the supplier from ‘pretending’ to charge VAT, then making off with the ‘extra’ money and not handing it over to the taxman.
How can I prepare for the domestic reverse charge?
Firstly, you’ll need to check if the reverse VAT charge affects your sales and/or purchases. Next, make sure that your accounting systems and software are up to date, ready to deal with the domestic reverse charge. At this stage, also consider whether the change will impact your cashflow and ensure that all staff under your employ are familiar with how it works.
It’s important to note that it only affects those supplying or receiving specified services under the construction industry scheme (CIS) and it doesn’t affect home/domestic users either.
How to prepare if you’re a contractor:
You’ll need to review all your contracts with sub-contractors to determine if the reverse charge applies to any of the services you receive. If you find it does, you’ll need to notify your suppliers asap.
How to prepare if you’re a sub-contractor:
If you’re a sub-contractor, the only thing you’ll need to do is contact your customers and get confirmation whether the reverse charge applies or not. The domestic reverse charge will only apply to you if:
- the supplies you make are within the scope of CIS
- the supplies are supply standard or reduce-rated
- the customer is VAT registered
- the payment is reported under CIS
- the customer is not an end user
What does the reverse charge VAT apply to?
According to HMRC, the reverse charge VAT will apply to you if your business supplies or carries out any of the following:
- Construction, alteration, repair, extension, demolition or dismantling of buildings/structures – also including buildings offshore
- Construction, alteration, repair, extension or demolition of walls, roadworks, power lines, electronic communications, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plants and installations for land drainage, cost protection or defence
- Installation of any building/structure for heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- Internal cleaning of buildings/structures during construction, alteration, repair, extension or restoration
- Painting/decorating internal or external surfaces for buildings/structures
The domestic reverse charge also includes any building or construction materials used to complete the services listed above. However, it does not include building and construction materials that are supplied separately to the construction services.
When does the VAT reverse charge not apply?
There are a few exemptions from the domestic reverse charge, including:
- If the service is zero rated for VAT
- The customer is not registered for VAT in the UK
- If the recipient is an end user such as a landlord or tenant
If the following services are supplied by themselves, they are also excluded from the new charge:
- Drilling or extracting oil or natural gas
- Extracting minerals and tunnelling, boring or construction of underground works for this purpose
- Manufacturing building or engineering equipment, materials, plant or machinery
- Manufacturing components for heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- Work carried out by architects or surveyors
- Making, installing or repaired artistic works – such as sculptures and murals
- Sign writing – including installation and repair work
- Installing seating, blinds and shutters
- Installing security systems such as burglar alarms, CCTV and public address systems
If VAT reverse charge doesn’t apply to you or the services you supply, then the normal VAT rules will apply instead.
How SixtyFour8 can help
At SixtyFour8, we understand that there’s so much to keep up with regarding the latest VAT rules and regulations – that’s why we’re here to help! Our team of dedicated personal accountants are construction industry professionals and are well prepared to handle your finances. Get in touch today for a personalised quote and take the worry out of your finances. Then all that’s left to do for you is to focus on the important stuff – like running your business.
Looking for more accounting advice? Read our guide to sole trader tax returns next.
