New VAT rules for the Construction Industry – The Domestic Reverse Charge

3 years, 5 months ago by Oliver Atkinson

Due to come into force on the 1st October 2020, HMRC have issued guidance for the new rules that will signify a major change in the way VAT is collected in the Construction Industry.

The new Domestic Reverse Charge will affect services across a wide range of sectors changing the way that their VAT is calculated.

Currently, any services that fall under the Construction Industry Scheme (CIS) will be subject to the Domestic Reverse Charge rules when both the supplier and customer are registered for VAT. Aside from general building work this would include groundwork, electrical and plumbing work, repairs and alterations to existing buildings as well as materials supplied in the course of this work.

In brief, the new rules will mean that VAT-registered customers (both individuals and businesses) receiving services subject to CIS will now be liable to pay the VAT incurred on those services to HMRC rather than the supplier. The customer will both account for the VAT as if the supply was made themselves and if applicable, also recover this VAT as input tax. This will apply to CIS-registered subcontractors who are registered for VAT, along with building services companies employing their skills or subcontracting out their own services to other VAT-registered companies.

For example, a VAT-registered groundworker invoices his VAT-registered contractor for services provided. Instead of applying 20% VAT as he would have previously done, he now states on his invoice that the services are subject to the Domestic Reverse Charge. The contractor notes this upon receipt of the invoice and calculates the correct amount to include as output tax on their VAT Return.

There are several primary exemptions to which Domestic Reverse Charge will not apply and the standard VAT treatment will be appropriate. Contractors will need to carefully consider if their work will be subject to the charge before invoicing their customer.

• The end user (or intermediary supplier), for instance a manufacturer or their intermediary who has hired a construction company to build a new factory for them. It is important that the contractor confirms their status as the end user before invoicing.
• Work done for utility companies that would normally be subject to CIS – for instance the repair of a gas line - as this is a component of the utility company’s assets and the utility company is therefore the end user.
• Employment businesses who supply construction workers that they pay themselves, since for VAT purposes the company is making the supply of staff, not construction services.

HMRC have released a 5-step guide to determine whether the reverse charge should be applied:

1. Is the payment for construction services within the scope of the Construction Industry Scheme (CIS)?

If NO, the normal VAT rules apply.

If YES, go to question 2.

2. Is the supply of ‘specified construction services’ for CIS?

If NO, the normal VAT rules apply.

If YES, go to question 3.

3. Are both the supplier and the customer registered for VAT?

If NO, the normal VAT rules apply.

If YES, go to question 4.

4. Is the supplier an employment business supplying labour-only services where the workers come under the control and direction of the customer?

If YES, the normal VAT rules apply.

If NO, go to question 5.

5. Is the customer an ‘end user’ or an ‘intermediary supplier’?

If YES, the normal VAT rules apply.

If NO, the VAT reverse charge applies.

This is a big change for the construction industry and could result in some disruption to the supply chain during the adjustment period as subcontractors adapt to the new rules, whilst possibly also having the knock-on effect of restricting short-term cash flows. It is worth noting that any output VAT accounted for under the reverse charge will not contribute towards the current VAT threshold.

HMRC are expected to release a bit more information in due course to cover the transitional period to advise those businesses for whom 1st October 2020 lands in the middle of their existing VAT period. For now, the existing guidance and definitions can be found here.

If you have any questions or queries regarding these changes that may affect your business, please feel free to get in get touch with us.