All you need to know about new VAT rules for construction.
In this article, our experts explain the Domestic Reverse Charge that is to be introduced for VAT on construction service from 1st of March 2021. So, stay with us!
As per new VAT rules, those subcontractors who are VAT registered will not charge VAT to VAT-registered businesses on certain construction services. Rather, the customer or the VAT-registered business will “self-account” for the VAT due.
This self-account for the VAT due is called Reverse Charge.
The main aim of the Reverse Charge is to counter ‘missing trader fraud’ – a malicious practice where construction companies are formed and services are delivered but when it comes to the output VAT payment on sales, these companies shut down their operations and disappear along with the VAT that they have collected from customers.
The newly-introduced Reverse Charge means that VAT is not paid until it reaches ‘private individual’ or ‘end user’ – thus practically halting VAT’s flow around the supply chain.
Who will be affected by Domestic Reverse Charge?
In simple terms, the term “affected construction services” is almost the same as those that apply to CIS [Construction Industry Scheme].
The Reverse Charge may apply when a VAT-registered construction business supplies construction services to another VAT-registered construction business.
The Domestic Reverse Charge will be only applied to the reduced-rated and standard-rated services whereas Zero-rated services will remain unaffected.
It means that those services which are required to be reported through the Construction Industry Scheme may be subject to the new VAT rules.
The list of these services is as follows:
Extension, repair, alteration, construction, dismantling or demolition of building structures [be it permanent or not], including the offshore installations.
Extension, repair, alteration, demolition, or construction of works forming, or to form, part of the land including road walks, walls, electronic communication apparatus, power lines, inland waterways, docks & harbours, aircraft runways, reservoirs, sewers, wells, water-mains, installations with the purpose of land drainage, industrial plants, defence, or cost protection.
Any installation — in any structure or building — of lighting, heating, ventilation, drainage, power supply, air conditioning, or fire protection.
Internal cleaning of structures and buildings performed during the repair, extension, construction, alteration, or restoration.
Decorating or painting the external or internal surfaces of any structure or building.
Those contractors and sub-contractors who might be affected may:
- Work through a recruitment agency,
- Supply their services to other large contractors,
- Work via an umbrella company.
HMRC has displayed a flowchart on their website to help you decide whether to apply normal VAT charges or Reverse Charge.
Is there any exception to the Reverse Charge?
Yes. You should note that Reverse Charge may be applied only if both parties — subcontractors and VAT registered businesses — are VAT registered.
There’s another exception. The reverse rules will not apply if the customer is a member of the public. In such cases where the customer is a member of the public, normal rates of the VAT will be applied.
The third and the key exemption is when the receiver of the service is an ‘End User’.
An end-user is defined as the entity that receives construction services but does not supply them forward to anyone else.
How to show the Reverse Charge on invoices?
The suppliers will show their sales as Zero-rated in the invoice they will add wording to highlight that the sale falls under Reverse Charge Category.
How to complete a Reverse Charge VAT return?
Suppliers will enter their sale in the Box-6 of the return. It means the supplier will not show or charge any output VAT in Box-1 of the VAT returns.
As far as the customer is concerned, he will be provided 2 entries in the Reverse Charge VAT return.
- The customer will add output VAT on the Box-1 of the VAT return and will leave Box- empty.
- The customer will enter the invoice’s value in the Box-7 of the VAT return, in a manner similar to the normal purchase. The Deemed input VAT will also be accounted for and entered in Box 4.
As the value added to Box-1 and Box-4 will be the same, there is not going to an overall impact on the VAT liability of the customer.
The value added to boxes 1 and 4 will be the same, so there should be no overall impact on the customer’s VAT liability.
How IBISS&CO can help?At IBISS&CO, our chartered accountants and tax advisers have helped in reducing the VAT liability of our valued clients to the minimum threshold legally. We are more than happy to do the same for you.
Reach out to us today for a 15-Minute Free call with our tax experts. Let’s begin a mutually beneficial relationship!