VAT reverse charge for building and construction services
From 1 March 2021 the domestic VAT reverse charge must be used for most supplies of building and construction services.
The charge applies to standard and reduced-rate VAT services:
- for individuals or businesses who are registered for VAT in the UK
- reported within the Construction Industry Scheme
When the reverse charge applies, a supplier of building or construction services does not charge VAT on those supplies to the customer. Instead the customer accounts for the VAT that would have been due on the supply as output tax on their VAT return, and (subject to the usual rules) claims it back as input tax on the same return.
This may put suppliers of such services in a position of regularly claiming refunds of VAT, as they no longer receive VAT on sales. They may therefore wish to consider moving to monthly VAT returns to improve their cashflow. Sub-contractors should also be aware that their customers will no longer be paying VAT, which will reduce the gross value of payments coming into the business. They will need to consider and plan for the impact of this on day-to-day cashflow.
There are various exceptions to the reverse charge, including certain services which, when supplied on their own, are excluded. Details are given in HMRC guidance (links below)
For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them. The reverse charge does not apply to supplies to end users where the end user tells their supplier or building contractor in writing that they’re an end user.
Intermediary suppliers are VAT and Construction Industry Scheme registered businesses that are connected or linked to end users. If intermediary suppliers buy construction services and re-supply them to a connected or linked end user, without making material alterations to the supplies, they’re all treated as if they’re end users and the reverse charge does not apply. The reverse charge does not apply to supplies to intermediary suppliers where the intermediary supplier notifies their supplier or building contractor in writing that they’re an intermediary supplier. Intermediary suppliers can refer to themselves as end users.
Suppliers of building and construction services need to:
- Check if the customer has a valid VAT number
- Check the customer’s CIS registration
- Review each contract to decide if the reverse charge will apply, and tell customers if so
- Ask customers if they are an end user or intermediary as described above
- Record the reverse charge in their accounts
Buyers of building and construction services need to:
- Check if the supplier has a valid VAT number
- Tell the supplier whether you’re an end user or intermediary
- Account for the charge
The above is a brief overview, HMRC’s detailed guidance is at: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#whentouse and https://www.gov.uk/guidance/vat-reverse-charge-technical-guide
Please contact us if you need any further information.