Andrew Needham looks at the introduction of the new domestic reverse charge for the construction industry.
The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.
It came into effect on 1 March 2021, and means the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier. It will only apply to individuals or businesses registered for VAT in the UK. This will affect businesses that supply or receive specified services that are reported under the construction industry scheme (CIS).
Affected businesses
Businesses must use the reverse charge if they are VAT registered in the UK, buy building and construction industry services and:
- payment for the supply is reported within the CIS;
- the supply is standard or reduced rated;
- are not hiring either staff or workers, or both; and
-
the business is not using the end user or intermediary exclusions.
If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.
In addition, if there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
If there is doubt as to whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
The reverse charge does not apply if the service is zero-rated or if the customer is not registered for VAT.
End-users
For reverse charge purposes, consumers and final customers are called end-users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.
The reverse charge does not apply to consumers or final customers of building and construction services. Any consumers or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them.
What are intermediary suppliers?
Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users. To be connected or linked to an end-user, intermediary suppliers must either:
- share a relevant interest in the same land where the construction works are taking place; or
-
be part of the same corporate group or undertaking (as defined in Companies Act 2006, s 1161).
The concept of intermediary suppliers means that if a number of connected businesses are collaborating together to purchase construction services, they are all treated as if they are end-users and the reverse charge does not apply to their purchases.
VAT return entries
Suppliers must not enter any output tax on sales under the reverse charge. The supplier only needs to enter the net value of the sale. If a business buys services subject to the reverse charge, it must enter the VAT charged as output tax in box 1 of the VAT return. Businesses do not enter the net value of the purchase as a net sale. The business may reclaim the input tax on reverse charge purchases in box 4 of the VAT return, subject to the normal VAT rules.
The reverse charge may also mean a business will make net repayment claims to HMRC, as it no longer receives VAT on its sales.
Practical tip:
Business should ensure that their accounting systems are ready to deal with the new accounting requirements under the reverse charge.
