VAT and the Construction Industry Reverse charge – Navigating your way through the proposed changes
20th September 2020
Marianne Hawksworth See profile
Originally due to be operational from 1 October 2019, HM Revenue & Customs (HMRC) then deferred the start date to 1 October 2020. Most recently, in June 2020, HMRC decided to delay the changes further, to enable businesses to prepare, until 1 March 2021.
The guidance issued by HMRC is not only lengthy, but also appears in a number of different places (e.g. in HMRC VAT Notices, Briefs and on HMRC’s website). It has also been updated and changed since the scheme was first announced in 2018.
Our focus here is therefore to summarise the key points around what you need to know, so you can determine if your business is ready for the changes, read further if you’re impacted and plan ahead to implement any actions needed.
As from 1 March 2021, certain supplies of building and construction work will be covered by the reverse charge rules, and these will no longer be subject to a VAT charge by the supplier. Instead, the customer must account for VAT on the supplier’s behalf. This measure has been introduced by HMRC to combat fraud in the construction industry.
Going forward, this means that there will still be VAT charges applicable to supplies, but some will be dealt with by the customer and not the supplier.
Your supplies are covered by the scheme if:
- you supply ‘specified supplies’ i.e. building and construction services in the course of construction or building (or supply and installation services); and,
- those supplies are currently subject to VAT at either the standard rate or the reduced rate (currently 20% or 5%, respectively); and,
- your supplies are to customers which are both VAT registered in the UK and registered under the Construction Industry Scheme (CIS); and,
- your customers are not final customers or consumers in a supply chain (the exclusions cover both end users or intermediary users and we define these below).
Your supplies aren’t covered by the scheme if:
- you supply materials only and don’t also install/fit them; and/or;
- your supplies are zero rated or disregarded for VAT purposes (i.e. are not subject to standard rated and/or reduced rated VAT); and/or;
- your supplies are to customers which are not VAT and CIS registered; and/or;
- you supply labour in the construction industry rather than services (e.g. employment businesses); and/or;
- you account for VAT under the flat rate scheme (please note however that you must still account for VAT on any reverse chargeable supplies you receive).
The onus is on the customer to confirm whether they aren’t subject to the reverse charge. If no communication ensues from them, you can approach them to check and should note their response. HMRC suggest you default to invoicing them as if they were subject to the reverse charge if there is any doubt, and if they’re both VAT registered and registered for CIS.
You should also check/verify customers’ VAT registration numbers and CIS registrations to ensure they are valid. Links to HMRC guidance on this are below:
As a customer, it’s important to know whether you will need to calculate VAT under the reverse charge. VAT will not be charged to you and instead you calculate output tax and account for it on your VAT return, and calculate input tax and also claim that on the return, according to the normal rules.
You will not be impacted if you’re:
- A final customer or consumer, e.g. a private individual, or a business or public body which makes no onward supplies of construction services – this can include property developers in certain circumstances
- The business/other organisation category of final customer or consumer will be either an intermediary supplier or end user as defined by HMRC and this status may vary depending on each project.
You should then be charged VAT under the normal rules, i.e. as at present. However, if you registered for both VAT and CIS, you are required to confirm to the supplier in writing whether you’re an end user (including an intermediary supplier) and not subject to the reverse charge. HMRC suggest you could embed this into terms and conditions to confirm that this will always be the case unless otherwise specified, if relevant to the type of contracts entered into with such customers.
An intermediary supplier can also be referred to as an end user. It’s important to know whether you fall into either category, as stated above.
End users are VAT and CIS registered businesses or groups of businesses which consume services i.e. don’t make onward supplies of the construction services received.
An intermediary supplier is VAT and CIS registered and connected or linked to one or several end users.
They will either:
- share a relevant interest in the same land on which the construction works are to take place; or,
- be part of the same corporate group or undertaking (as defined in section 1161 of the Companies Act 2006).
Those sharing a relevant interest will include, for example, landlords and tenants. Those within the same group would typically include those within a property owning group making charges to other members of the group, or to third party tenants.
Key considerations for your business will include identifying matters which need to change or to be introduced; analysing the impact of the changes; introducing controls and procedures to ensure compliance; and to mitigate or eliminate risk.
These may include, but are not limited to :
Cash flow – no VAT payments will be received from customers which reverse charge the VAT, impacting cash flow; no output tax to pay HMRC which could improve cash flow. Can timings change to alleviate this?
Will your business change from being a net VAT payer to a net VAT claimer, meaning a potential move to monthly VAT returns may be beneficial if most contracts are supplied under the reverse charge regime?
Training – staff dealing with negotiating pricing and contracts will need to be trained to recognise the impact of the changes, as will accounting staff.
Invoicing – staff working in sales and purchase ledger roles and/or dealing with VAT accounting will need to understand how to issue and when to accept the correct documentation. Additional wording acknowledging the reverse charge is applicable and is required. This will include self-billed and authenticated receipts, as well as credit notes.
Contracts spanning 1 March 2021 – identify the correct tax point (the date VAT must be accounted for), consider whether apportionment is required; are the contract payments covered by the current rules or partly or wholly by the new rules?
Identify the VAT status of your VAT and CIS registered customers and validate these. Provide written confirmation of your own status if you’re an end user or an intermediary supplier.
Varying VAT status – note that the same customer – or your business – may have a different status depending on the project, e.g. property developer on some and building contractor for others. Certain organisations may normally be subject to the reverse charge as a contractor but sometimes carry out work which is not covered by the reverse charge or vice versa.
Simplification measures – you can agree the reverse charge is applicable to all supplies made for multiple contracts across numerous sites with the same sub-contractors (applicable where over 5% of the value or volume are subject to the reverse charge).
Credit notes – you can agree not to issue these, if the customer can claim VAT and the adjustment is for a commercial reason e.g. price change?
A link to the most recently updated, detailed HMRC can be found here.
Whilst the new framework is potentially a bit of a minefield, we hope that this article has helped you identify the key points and areas which need implementing.
Old Mill can assist in overcoming the practical difficulties and help set you on a trouble-free journey. If you are interested in bespoke advice, please contact your Old Mill adviser or click here…