VAT Reverse Charge for UK Building and Construction Companies
Starting on 1 October 2019, the UK building and construction services will start paying A VAT reverse charge. This is a new tax designed to eliminate VAT fraud in the industry. The VAT reverse charges are expected to impact significantly on cash flow and VAT compliance.
The introduction of the tax implies that customers within the industry who will receive
construction service will pay and account for the VAT directly to HMRC. However, there are exceptions to the rule. They include supplies between the landlord and tenants, supplies tofinal consumers as well as supplies between connected parties.
Obviously, the new rule will affect how businesses in the building and construction sector will mana ge their cash flow and account for Value Added Tax. It will also bring significant changes in the system and process. According to HMRC, VAT fraud in the in large construction projects in labour supply chains has increased significantly. Therefore, the UK government decided to introduce the Construction Industry Scheme to address Value Added Tax fraud. It is one of the options that will help address and reduce instances of VAT fraud. The fraud is believed to cost the exchequer about £100m annually.
Implementing the reverse charge will impact on how entities in the construction sector will account for VAT. Businesses affected will have to implement a few changes to help them comply with the legislation. Since the 1st of October is just a few days away, the affected business must take urgent measures to implement the necessary changes to help them comply.
Notice that the reverse charge is not a new concept in the UK. It has been used to counter fraud in computer chips, mobile phone sector, and telecommunication sector. Basically, the charge shifts the VAT liability to the customer. Initially, accounting for Value Added Tax was done by the suppliers but it was bedevilled with fraud. By shifting the responsibility to the customer, it stops the suppliers charging VAT which they seldom remit to HMRC.
How It Will Work
Starting 1st of October this year, all VAT registered businesses which receives construction or building services from another VAT registered entity will need to account for reverse charge on its VAT returns. It implies that a business will no longer pay the value added tax element to the suppliers but will instead pay it to HMRC.
The VAT reverse charge will be felt through the supply chain. It will stop at the point the
customer receiving such supplies is the final consumer. The reverse charge will be linked to the CIS which implies that the subcontractor will need to know if the customer reports payment under CIS. This will allow the reverse charge to apply. It implies that contractors and subcontractors will assume that the reverse charge is not applicable and so will charge VAT normally if the customer is not applying CIS. Suppliers will, therefore, assume that the reverse charges apply if the customer confirms in writing that, indeed, they are the end- user. Such writings confirm that they will not account for VAT.
The customer is therefore obligated to inform the supplier that they are end-users. This
way, the supplier does not apply the reverse charge. By notifying the supplier that they are the end-user, the supplier should then issue them with a corrected invoice.
The second issue is that the customer's status can change in the middle of the transaction. A good example is that of a developer who is a final user but who intends to sell the building once it is completed. But if they sell a partially completed building and continue to supply the construction service to the new owner, they will cease being the end-user. In such a case, they may have to notify the supplier of their new status since the reverse charge will need to apply.
Should The Reverse Charge Be Delayed?
Well, there are a few concerns that small businesses may not be ready for such changes. So, they want the reverse charges to be delayed to give them more time to prepare.
The suppliers are under the obligation to issue Value Added Tax invoices in which they
should state if it is subject to domestic reverse charge. They will also be required to state the amount due and which isn’t included in the total Value Added Tax charged.
For supplies that will be offering continues supplies of service before and after the 1st of
October, the normal VAT rules will be applied. But invoices whose tax point comes after or on 1st October will be subjected to domestic reverse charge rule.
As mentioned, a domestic reverse charge might have an effect on Value Added Tax
compliance and management of cash flows for the businesses concerned. Therefore, there will be the need to introduce new systems and amendment of processes to allow the businesses to implement new rules. Implementing the rules means that smaller
subcontractors who are currently relying on positive cash flow when it comes to VAT
elements will need to make adjustments. They will have to do this when the VAT elements disappear as a result of reverse charge rules. Also, it is anticipated that the implementation of the reverse charge VAT will bring cash flow difficulties for subcontractors. To minimize the supply chain disruptions, it may be necessary to ensure that subcontractors prepare well.
HMRC has said that it is aware that errors may occur in the first few months. So it will deal lightly with errors made by individuals trying to implement the new rules. However, such people must act in good faith.
Note that the VAT will only apply to businesses or individuals registered for VAT. But it will not apply to consumers. However, anyone supplying or receiving services reported under will be affected by the reverse VAT charges.
What You May Need To Do
If you fall in the bracket of those who will be affected by the reverse VAT charges, there are things you will need to do to comply.
First, you will need to update your software and accounting system. Second, it is necessary to ensure that your staff responsible for VAT are aware of how it works. They may need to be trained to familiarise themselves with how it operates. Here is what you will need to do.
Review all the contracts you have with subcontractors. It will help you decide whether the reverse charge applies to them or not. Also, you must notify your suppliers about the new reverse charge.
All subcontractors must contact their customers so that they get confirmation whether it applies to them. If they discover that the customer is the end-user, they will have to
shoulder the charge. If there are intermediate suppliers, the charge will apply to them.
Services That Will Be Affected
All building and construction services will be affected by the charge if what they supply is reported under CIS. The two i.e. CIS and reverse charges are affected if materials are
included in the service. However, it is critical to note that the reverse charge will not apply to services that are VAT zero-rated. Also, some service supplied to the intermediates connected to end users may not attract the charge. For instance employment business that supply manpower and who pay the temporary employees are not subjected to the charge.
Services that attract the reverse charge
If you supply the following services, you will be subject to the reverse charge.
- Dismantling or demolishing structures
- Constructing, repairing existing structures
- Extending or offering offshore services.
Constructing or repairing electrical communication equipment, inland waterways, railway, aircraft runaway, power line, road works harbour, and docks. Others are wells, water mains, reservoirs, pipelines, industrial plant, wells, reservoirs, drainage systems defence or coastal protection.
Also, the charge will apply to internal cleaning of structures and buildings that have been
constructed, restored or repaired. Also, if the service you offer entails decorating or painting the external or inside of a building, site clearance provision of roadways or landscaping, it will attract the charge.
Services excluded from the reverse charge
- Extracting or drilling for natural gas and oil
- Mineral extraction including boring, tunnelling or underground works.
- Delivering engineering and building equipment, machinery plants to these sites.
- installing lighting, ventilation, drainage, power supply, air-conditioning, water
- supplies and sanitation to these sites.
- Also services such as those offered by surveyors, engineers and landscape
- consultants to these sites.
- Making artistic works including installing, repairing murals and sculpture
- Signwriting works including installing and repairing signboards for advertisement. Also installing blinds, shutters, and seating are excluded
- Services that installs security systems, closed circuits, and burglar alarms, public
- address systems, and CCTV
Filing Monthly Returns
Reverse charge VAT will make some businesses become repayment traders. In effect, they will need to make claims from the taxman. In such a case, repayment traders should make monthly returns. It will help to speed up making claims from HMRC. Each business needs to determine the time to make monthly returns. For customers submitting returns on the 30th of September, they can request the changes so that they start making their monthly return on 10th of November. Thereafter, they will need to submit their returns monthly.
A service subject to reverse charge whether it is supplied as a unit service or not will be
subjected to the charge. Also, the supply of fix work such as a joiner construction will be
subjected to the charge even when the installation is just a fraction of the overall charge.
Also if there is a reverse charge between any two entities on a project, any subsequent
supply of service will be considered as a reverse charge service.
MRC has directed that if there is any doubt as to whether a service falls in the definition, the reverse charge will apply if the recipient is registered for VAT.
Any business that has numerous active contracts will have each contract checked by HMRC. However, a single VAT treatment will be considered for the numerous contracts carried out by a particular subcontractor. Thus, if a contractor evaluates the contracts with a certain subcontractor and determines that the reverse charge applies to over 55 percent of the contracts, the reverse charge will apply to all contracts.
The reverse charge will not apply to the final consumers of construction service. But final consumers registered for CIS and VAT must have the reverse charge applied to services they receive. Thus asking whether the customer is an intermediary or end-user is critical.
So who is the final consumer?
In as far as the reverse VAT is concerned, the final consumer will be referred to as end-user. It refers to businesses which don’t pass or supply such construction services to another person. However, such businesses must be registered for CIS and should be engaged in construction operations. The business may have its value of services exceeding the CIS threshold.
They are businesses that are CIS and VAT registered but which are connected to the end-user. To be linked to the end-user, they need to:
- Be part of the undertaking or corporate defined in Company act 2006 sec 1161.
- Share some interest in the same piece of land where the construction work is taking place.
If several connected businesses are collaborating to buy a construction service, they will be treated as end-users. In such a case the reverse charge will not apply to their purchase.
Having a lease or renting pieces of lands that are believed to be connected to a group you have interest makes you an end user. All such tenants and members of the property-owning group will be treated as end-users. However, anyone with temporary rights to occupy any piece of land or carry out construction activities cannot be said to have an interest in the land.
From this, discussion, it is clear that one cannot choose to be an intermediate supplier or final user. Only facts can determine where you fall. Therefore, asking the supplier and
keeping the records to their answers will help you decide whether VAT should be applied
normally or is subject to reverse VAT charge.
If a customer carries out repeat purchase and is known to be an end-user, charging them VAT in a normal way is acceptable.
If a person is a final consumer but they have not provided a written confirmation, they can notify the supplier and obtain a corrected invoice. Businesses that deal with final users can include the statement or a phrase as part of the terms and conditions. The statement could say that it is assumed that the customer is an end-user. It is expected that the customer will respond if they are not the final consumers.
Verifying VAT status
One needs to confirm that the customer is VAT registered before applying the reverse
charge. It is easier to do this. Check if the VAT number they have supplied is owned by them or not. This can be checked on the European Commission website.
To verify if a customer is CIS registered
Ask any new customer to provide their registration details. If they provide a copy, it is
recommended that you keep it. You can also use the CIS verification system for anyone
registered for CIS. But you will need to confirm the order placed with the subcontractor in question.
When the reverse charge treatment changes
There are situations where it may be necessary to change how you treat VAT. For instance, if the customer does not retain an interest in the said piece of land or the property is sold with a partially completed building the treatment changes. If the contractor continues to supply construction services, it means that the end-user exclusion will cease to apply. In which case the customer needs to notify the supplier of the changed status. It enables them to apply the reverse charge.
If the change takes place during the invoice period, you have the freedom to use either the normal VAT rules or the reverse charge. You can also choose to subject the entire invoice to the reverse charge treatment or wait to implement the changes in the following invoice period.
The tax point
Provision of the construction services is believed to continue. In which case, it may be
mandatory to determine the point at which VAT is due. In most cases, VAT is due when
payment is received or when the supplier issues an invoice. It all depends on which one
comes fast. In the case of a one-time payment contract, the point at which the service is
completed or performed is referred to as the tax point.
What about when the payment and issuing VAT invoice is done before the service is
completed or performed? In this case, the tax point will remain at the point where payment is made or invoice issued. Whichever of the two comes first, determines our tax point. In a case where a VAT invoice is issued within 14 days of completion or performance of the, service, then the tax point is the date the invoice was issued.
Cash Accounting Scheme
The system need not be used when dealing with services on which reverse charge is
applicable. The reason is that in such a case, no VAT is paid by the customer. Thus, there is no cash flow impact on businesses. The customer accounts for VAT to the HMRC. So anyone supplying a building and construction service that is subject to the reverse charge, will not be required to account for value-added tax on the service performed.
Notice that contractors that receive reverse charge supplies but who use the cash
accounting scheme cannot reclaim VAT on the service supplied until they remit the payment to the supplier. This implies that anyone receiving construction or building services but who utilizes the cash accounting scheme may not reclaim the Value Added Tax on services supplied until when they pay the supplier.
So, with effect from 1 October 2019, anyone receiving a service that falls under reverse
charge will not need to pay the VAT to the supplier but will have to account for VAT and
simultaneously recover it on the VAT return. But they will be expected to follow the normal VAT input Tax deduction.
VAT On Sales
Small businesses that account for VAT on payments received and made Many small and medium-sized businesses in the building and construction industry account for Value Added Tax based on payment received and made. But starting from 1st Octoberthe following changes will take place.
- Customers will not pay VAT to suppliers for services covered under domestic reverse charge
- You will include the sales in box 6 of Value Added Tax return as soon as you receive payments.
- Anyone supplying services that are not covered by reverse charge must account for the Value Added Tax on the date they receive the payment.
VAT On Purchases
If you purchase a service covered under reverse charge from a subcontractor you will be
required to account for Value Added Tax in box one. You will be expected to recover the
money when they file the same VAT return. The accounting for the same should be done on the date the payment to the subcontractor was made. But where a tax invoice was issued beforehand, VAT should be accounted for based on the date invoiced.
Flat Rate Scheme
If you are using this scheme and yet you supply building and construction services, you will need to change. This is because VAT will not be paid to you and so the scheme will not be beneficial to your business.
The invoices for services that are subject to domestic reverse charge will need to:
- Show all the information required on the VAT invoice
- Indicate on the invoice that domestic reverse charge is applicable. So, the customer will need to account for VAT directly to HRMC
- State the amount of VAT due, but it should not be charged to the client if the service falls under reverse charge.
- If the software you use cannot show the exact amount of Value Added Tax that needs to be accounted for, the invoice should express that VAT will be accounted for by the customer for services under reverse charge.