After a couple of false starts, HMRC’s VAT reverse charge for building and construction services is finally due to come into force from 1 March 2021.
This is a hot topic for property and construction businesses right now and an additional administrative burden in already tricky times.
Below is a summary of the basics.
Who is affected by the changes to the Reverse Charge?
From 1 March 2021, all UK VAT registered individuals or businesses that receive or supply standard or reduced rate services reported within the Construction Industry Scheme need to consider the new domestic VAT reverse charge scheme.
Suppliers must use the reverse charge from 1 March 2021 if they are UK VAT registered and:
– the customer is UK VAT registered.
– payment for the supply is reported within the Construction Industry Scheme (CIS).
– the services are standard or reduced rated.
– they are not an employment business supplying either staff or workers, or both.
– their customer has not given written confirmation that they are an end user or intermediary supplier.
What should a supplier do now?
1. Check their customer has a valid VAT number.
2. Check their customer’s CIS registration.
3. Review their contracts and if the reverse charge will apply, tell their customers.
4. Ask their customer to confirm if they are an end user or intermediary supplier (see below).
5. Work out how to record the reverse charge in their accounts.
If the customer confirms they are an end user, the reverse charge does not apply. Invoices should be raised with no change and VAT applied and accounted for as before.
I am a supplier and have confirmed the reverse charge applies. What do I do from 1 March?
– Sales invoices should be raised with no VAT (although still a taxable supply).
– Ensure the invoices state that the reverse charge applies.
– Report the sales in the Turnover box only on your VAT Returns.
– Customers will no longer pay you the VAT element. This could have a considerable cashflow impact. You should consider moving to monthly VAT returns to aid the cashflow burden.
What do the changes to the Reverse Charge mean for buyers?
Buyers must use the reverse charge from 1 March 2021 if they are UK VAT registered and:
– Payment for the supply is reported within the Construction Industry Scheme (CIS).
– The supply is either standard or reduced rated.
– They are not hiring either staff or workers, or both.
– They are not an end user or intermediary user (see below).
What should a buyer do now?
1. Check their supplier has a valid VAT number.
2. Determine whether or not they are an end user or intermediary user. If they are an end user or intermediary user then they need to inform their supplier.
3. Work out how to record the reverse charge in their accounts.
If the buyer is an end user or intermediary user, then the reverse charge does not apply. Invoices should be received with no change and VAT applied and accounted for as before.
I am a buyer and have confirmed the reverse charge applies. What do I do from 1 March?
– From 1 March 2021, ensure that invoices received from suppliers are correct and if within the reverse charge scheme, are raised with no VAT.
– Record the reverse charge on your VAT return. This means:
o Calculate what the VAT input tax would be and put this is the purchase input tax box.
o Enter the same amount in the output tax box. This cancels with the above so has no overall effect on the VAT being paid/claimed.
o Include the purchases amount (which excludes any VAT) in the purchases box.
Am I an “end user”?
Consumers and final customers are called “end users”. For the purposes of the Construction Industry and the VAT Reverse Charge, this will mean businesses, or groups of businesses, that are UK VAT and CIS registered but do not make onward supplies of the building and construction services provided to them.
In practical terms, for property and construction companies, this will usually be the company that owns or leases the property where the works are taking place.
The reverse charge does not apply to end users (as long as the end user informs their supplier in writing that they are an end user)
What about a Corporate Group scenario?
“Intermediary suppliers” are UK 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:
– Have a relevant interest in the same land where construction works are taking place, or
– Be part of the same Corporate Group or undertaking.
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 are intermediary suppliers. Intermediary suppliers can refer to themselves as end users.
The most common question at the moment is what happens where a Group company (ConstructCo Ltd) carries out the construction work and charges to a fellow Group subsidiary company that owns the property (PropCo Ltd).
In this scenario, ConstructCo is an “intermediary supplier” and Prop Co Ltd is an “end user”.
The reverse charge will not apply on any transactions between ConstructCo Ltd and PropCo Ltd and will also not apply on any transactions between ConstructCo Ltd and third-party subcontractors. In other words, there is no change from existing procedures.