Effective from the 1st March 2021, you must use the domestic VAT reverse charge for most supplies of building and construction services. Continue reading to discover everything you need to know about the VAT domestic reverse charge.
What is the VAT domestic reverse charge for construction?
The VAT domestic reverse charge for building and construction services applies to transactions reported under the Construction Industry Scheme (CIS) and are between VAT-registered contractors and sub-contractors.
The reverse charge was introduced on the 1st March 2021 and changes the way VAT is charged for certain kinds of construction services in the UK. It applies to both standard and reduced-rate VAT supplies, but not zero-rated supplies.
The new reverse charge taxation system will mean that VAT cash will no longer flow between businesses. The VAT will be registered and clearly stated on the invoice as a reverse charge for every transaction made. Rather than the supplier charging and accounting for the VAT, the customer now accounts for the VAT.
Why was the domestic reverse charge for construction services introduced?
The VAT reverse charge is a new effort by the government to combat missing trader fraud. Missing trader fraud occurs when fraudsters set up as regular construction companies and charge VAT for the services they supply but then disappear without paying their VAT bill. They operate anywhere from six to nine months and close down without paying any tax to HMRC – effectively taking with them a 5% or 20% additional profit that doesn’t belong to them.
What services does the VAT domestic reverse charge apply to?
It applies to the following services:
- Constructing, altering, extending, repairing, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services;
- Constructing, repairing, altering, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, power lines, roadworks, aircraft runways, electronic communications equipment, railways, inland waterways, pipelines, reservoirs, docks and harbours, wells, sewers, water mains, industrial plant and installations for purposes of land drainage, coast defence or protection;
- Installing heating, air-conditioning, lighting, power supply, ventilation, sanitation, drainage, water supply or fire protection systems in any building or structure;
- Internal cleaning of buildings and structures, so far as carried out in the course of their construction, repair, alteration, restoration or extension;
- Decorating or painting the inside of the external surfaces of any building or structure;
- Services that form an integral part of or are part of the preparation or completion of the services described above – including earth-moving, site clearance, tunnelling and boring, excavation, erection of scaffolding, laying foundations, site restoration, landscaping and the provision of roadways and other access works.
What services does the VAT domestic reverse charge not apply to?
It does not apply to the following services when supplied on their own:
- Drilling for or extracting natural gas or oil;
- Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose;
- Manufacturing building or engineering components or equipment, plant or machinery, materials, or delivering any of these to site;
- Manufacturing components for lighting, heating, ventilation, power supply, air-conditioning, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site;
- The professional work of surveyors or architects, or of building, interior or exterior decoration, engineering and landscape consultants;
- Making, installing and repairing artworks such as murals, sculptures and other items that are purely artistic signwriting and erecting, installing and repairing signboards and advertisements;
- Installing blinds, shutters and seating;
- Installing security systems, including burglar alarms, closed-circuit television and public address systems.
How do I display the VAT reverse charge on my invoices?
Alongside all the usual information included in a VAT invoice, it should also clearly show that the reverse charge has been applied. Here are some examples of wording that meet the legal requirements:
- Reverse charge: Customer to pay the VAT to HMRC
- Reverse charge: VAT Act 1994 Section 55A applies
- Reverse charge: S55A VATA 94 applies
What is the 5% disregard for the VAT reverse charge?
Usually, if any of the supply services are subject to the reverse charge, all other services supplied will also be subject to it. However, if the reverse charge part of the supply accounts for 5% or less of the whole supply’s value, this can be disregarded (this is known as the 5% disregard), and standard VAT rules will apply if the customer makes an intermediary supplier or end-user notification.
Supply and fix works will be subject to the VAT reverse charge because the goods and services are part of one supply for VAT purposes. For example, a joiner constructing a staircase offsite then installing it onsite will be making a reverse charge service, even if the charge for the installation is a small (subject to the 5% disregard) element of the overall cost.
It is also worth noting that if two businesses already had a reverse charge service between them on a construction site, if convenient, they can both agree that any subsequent construction supplies on that site can be treated as reverse charge services.
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