John Davison discusses an issue relevant to all VAT and Construction Industry Scheme registered businesses that receive or supply construction services.

Issue

HMRC are introducing a reverse charge on construction services from 1 October 2020 (called the domestic reverse charge in HMRC guidance documents). This means that the customer has to account for the VAT on the supply of some construction services. Normally the supplier accounts for VAT on the supply of goods or services, but the reverse charge changes this. This has implications for accounting systems and cash flow for the provider of construction services as well as the recipient of the services.

How the reverse charge works

Usually a supplier of goods or services charges VAT on its supplies. The customer that has received the supplies can reclaim the VAT that it is charged (subject to the normal VAT rules). The reverse charge alters this. Where a reverse charge applies, the supplier no longer accounts for the VAT that is due, instead the customer accounts for the VAT to HMRC but can still claim back this VAT if they are eligible to recover the VAT.

VAT Return

Although the supplier does not account for the VAT due on the supply the supplier must still include the value of the supply is still to be declared in box six of the VAT return. As VAT is no longer being declared on all supplies, due to the reverse charge, the supplier may find that it is due regular repayments of VAT. Where this is the case the supplier can request to use monthly returns to accelerate the repayment of the VAT due to it.

The recipient of the supply must account for VAT on the supply by declaring the VAT due in box 1 of the VAT return. The value of the supply is not to be declared in box six (as the supplier has made this declaration). This may cause problems with accounting software as there may be an expectation that the VAT declared in box one will not exceed 20% of the value in box 6.

The recipient of the supply can claim back the input tax, the VAT on the reverse charge on construction services, subject to the normal VAT rules by claiming this amount in box 4 of the VAT return. The value of the supply is also to be declared in box 7 in the normal way.

Supplies affected by the reverse charge

The reverse charge applies to all supplies of building or construction services that are supplied at the standard or reduced rates that also need to be reported under the income tax Construction Industry Scheme requirements (CIS rules). It should be noted, however, that there are differences between the VAT reverse charge requirements and the CIS. The reverse charge applies to both the goods and labour services supplied, whilst the CIS only applies to the sub-contractors’ services and not the materials. The reverse charge does not apply to any supplies that are zero-rated even though the CIS requirements still need to be met. The reverse charge also does not apply to supplies made to end users or intermediaries connected with end users. An end user is (generally) a final consumer or a person that is not registered for the CIS scheme.

Examples of supplies that are subject to the reverse charge include:

  • Construction, building, demolition services;

  • Repair or alteration works;

  • Civil engineering works;

  • Installation of heating, lighting, ventilation, power air-conditioning and drainage;

  • Internal cleaning where provided as part of a construction, alteration repair or restoration service;

  • Painting and decorating; and

  • Services that are integral to these services.

Services not subject to the reverse charge include:

  • Mining or oil and gas drilling services;

  • Component manufacturing;

  • Professional services;

  • Signwriting and installing signboards; and

  • Installing seating, blinds, shutters, security systems, CCTV and public address systems.

Where a supply is made that contains elements that are subject to the reverse charge and elements that are not subject to the charge, the whole service will be subject to the reverse charge. HMRC give an example of a supply and fit contract. Where a carpenter constructs a staircase offsite, this would not be subject to a reverse charge. When, however, the contact calls for both construction of the staircase and its installation, then this is subject to the reverse charge.

The reverse charge does not apply where:

  • The supply is made to an end user such as a property owner or directly to a main contractor that sells or lets a newly completed building;

  • The recipient makes an onward supply of the construction services to a connected company;

  • The person receiving the supply is not VAT registered or not registered for CIS;

  • There is a landlord and tenant relationship between the supplier and recipient; or

  • The supplies are zero-rated.

It will be necessary to mark invoices as being subject to the reverse charge, or state that the customer is to pay the VAT due on the supply to HMRC. The invoice may also state that the supply is subject to VAT under section 55A VAT Act 1994. Where an authenticated receipt is issued by the recipient of the supply this should state that the customer will account for VAT if the supply is subject to the reverse charge.

Issues that may arise

The biggest problem will be for the recipients of a supply to determine the VAT liability of the supplies that it receives. Construction services can be zero-rated, subject to the reduced-rate or the standard-rate. It is essential for the recipient of the supply to correctly determine the VAT liability of the supplies it makes. A further problem will be in determining if the parties are VAT registered, in the CIS scheme and also what the recipient of the supply intends to do with the property. It will be important to obtain undertakings from customers to determine if the supplier is to charge VAT or treat the supply as being subject to the reverse charge. Undertakings should also be obtained concerning the CIS and VAT status of customers. The cash flow implications of the change in VAT accounting should also be modelled in the businesses’ management accounts and cash flow forecasts.

Further information

To determine if a person is registered for VAT the EU’s VIES VAT number validation system can be used. This is at:

http://ec.europa.eu/taxation_customs/vies/

Once the UK leaves the EU it may be necessary for HMRC to create a different database.

The CIS status can be verified by using the HMRC CIS online service at:

https://www.gov.uk/use-construction-industry-scheme-online

HMRC have also produced a flowchart that helps determine if the reverse charge applies. This is at:

https://tinyurl.com/vatdrchg

Last reviewed 26 July 2019