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New VAT rules for building and construction services – The VAT Reverse Charge

From the 1 October 2019 the way that contractors and sub-contractors deal with VAT is changing for VAT-registered builders and contractors who either purchase or provide services.

Whilst this is in principle an administration change it can impact on cashflows.

Supplies that are affected:

The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS).

  • It does not apply to zero rated services (e.g. work on new build residential properties) or to supplies made by non-VAT registered businesses.
  • It does not apply to payments to sub-contractors who are not VAT registered.
  • It does not apply when buying materials alone.

Therefore, supplies between sub-contractors and contractors, as defined by CIS, will be subject to the reverse charge unless they are supplied to a contractor who is an end user. An end-user is typically the customer who uses the supply for themselves, rather than somebody who will sell on the supply.

The legislation also allows for those connected to end users, including landlords or tenants, to also be treated as end users. Therefore, intra-group and leasing re-charges of building and construction services connected to the end user are also excluded from the reverse charge.

The flowchart below can be used to determine if supplies are within the VAT reverse charge.

Which type of supplies are affected by the new rules?

The new reverse charge will apply to the transactions between builders/construction industry businesses, it does not apply to supplies to non-construction businesses.

The reverse charge will also apply to any goods supplied by the builder as part of their work;

The reverse charge is based on the rate of VAT that applies for the work in question but only supplies subject to either 5% or 20% VAT. Zero-rated sales are excluded.

What is different?

Under current rules, a builder charges VAT to their customer, collects the VAT from the customer and accounts for it in Box 1 of their relevant VAT return.

This is changing for supplies between VAT-registered builders and contractors in the construction industry. The supplier will invoice their customer without charging VAT and the customer makes the Box 1 entry instead on their own VAT return.

Impact on Cashflows?

For the purchaser there will little or no difference. The VAT declared in Box 1 will also be included as input tax in Box 4, a neutral position. This is the “reverse charge” procedure.

For the supplier they will no longer charge and collect output tax on their supply. This could result in the supplier finding themselves in a VAT repayment position – hence, consideration should be given to switching to monthly VAT returns in order to speed up refunds.

Responsibilities – evidence and invoicing:

Purchasers of services are required to notify a supplier that they are either an ‘end user’ (where the reverse charge does not apply), or an intermediary (where the reverse charge will arise). Written evidence should be requested and retained by the supplier. If such evidence is not provided then the purchaser will be responsible for accounting for VAT under the reverse charge.

Suppliers need to verify that the purchaser is both registered for the CIS (Construction Industry Scheme) and also has a valid VAT number.

Suppliers, when issuing invoices where the reverse charge applies must:

  • show all the information normally required to be shown on a VAT invoice
  • annotate the invoice to make clear that the domestic reverse charge applies (see wording below) and that the customer is required to account for the VAT

The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

Under the VAT Regulations 1995 invoices for domestic reverse charge supplies, when the customer is liable for the VAT, must include the reference ‘reverse charge’. The following examples fulfill the legal requirement:

  • Reverse charge: VAT Act 1994 Section 55A applies, or
  • Reverse charge: S55A VATA 94 applies, or
  • Reverse charge: Customer to pay the VAT to HMRC

Tax points (for VAT purposes)

The provision of building and construction services are continuous supplies of services. The tax points are therefore the issue of a VAT invoice or the receipt of payment, whichever is earlier (Regulation 90 of the VAT Regulations 1995). Additionally, in certain circumstances, where there is a delay beyond one year in issuing a VAT invoice or receiving payment, an annual tax point will apply (Regulation 94B(5) of the VAT Regulations 1995).

Impact on VAT returns

Purchasers will include the VAT amount as an output in Box 1 but do not include any amount for the supply in box 6. Purchasers will also include the same VAT amount as an input in Box 4 and will also include the purchase in the Box 7 value of purchases total too.

Suppliers will not include any amount in Box 1. The supply will however, be included in Box 6.

VAT Flat rate scheme (FRS) businesses

Suppliers do not include reverse charge transactions in their FRS turnover. If a business within the FRS scheme makes reverse charge supplies it is recommended that FRS suitability is reviewed given the input tax restrictions that apply to FRS scheme businesses.

Purchasers within the FRS scheme, who receive reverse charge supplies, should deal with these outside of the FRS scheme (i.e. follow the return instructions in the previous section).

Penalties issued by HMRC for errors

HMRC has confirmed that penalties will not be charged for mistakes with the new VAT reverse charge procedures up until 31 March 2020, the exception being if “you are deliberately taking advantage of the measure by not accounting for it correctly.”

If you require assistance with these new VAT rules for building and construction services, please contact DTE Tax Consultancy team on 0161 767 1291, or email enquiries@dtegroup.com.