VAT change for construction sector from 1 March 2021, HMRC will introduce a domestic VAT reverse charge for building and construction services.
This will have an impact on many contractors and subcontractors in the construction industry scheme.
WHEN THE SCHEME APPLIES
The new scheme will apply where:
• Services are supplied by a VAT registered supplier to a VAT registered customer.
• The services are liable to VAT at the standard or reduced rate. It does not cover zero-rated supplies, such as the construction new dwellings.
• Payment for the services is reported within the Construction Industry Scheme (CIS), although unlike CIS, the reverse charge applies to labour and materials.
• The recipient of the supply is not an end-user or an intermediary supplier. End users do not make onward supplies of a construction service. Intermediary suppliers are connected to end users and resupply the services to an end user without material alteration.
Developers selling new buildings would be end-users as they are not resupplying the construction services but are selling buildings. Main contractors constructing buildings for the developer are not end-users as they would resupply construction services they receive as part of their charge for services to the developer.
WHAT TYPES OF SERVICE ARE COVERED BY THE SCHEME
The legislation sets out the construction services that are to be covered by these new rules and these include:
• Construction, alteration, repair, extension, demolition or dismantling of buildings or structures
• Construction, alteration, repair, extension, demolition of any works forming, or to form, part of the land, including walls, roadworks, powerlines, electronic communications, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
• Installation of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection in any building or structure;
• Internal cleaning of buildings and structures, when carried out in the course of their construction, alteration, repair, extension or restoration;
• Painting or decorating the internal or external surfaces of any building or structure;
• Services which form part an integral part of, or are preparatory to, or are for rendering complete the services described above including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
Normally if any service in a supply is subject to the reverse charge, all other services supplied will also be subject to it. However, if the reverse charge part is 5% or less of the value of the whole supply this can be disregarded and normal VAT rules will apply.
Both elements of a supply and fix contracts or separate contracts for labour and materials would be covered by the reverse charge if provided at same time and on same site reverse charge applies to both (subject to 5% test).
Where goods not ordinarily incorporated into new house are supplied and installed in new build housing the reverse charge does not apply. VAT should be charged and accounted for on these items in the normal way.
WHAT YOU WILL NEED TO DO
As a supplier:
• Check if your customer has a valid VAT number
• Check your customer’s CIS registration
• Ask your customer to confirm in writing whether they are an end user or intermediary supplier unless it is clear they are a domestic consumer
If the reverse charge applies the invoice you issue must:
• Show all the information required on a VAT invoice
• State that the domestic reverse charge applies and your customer is required to account for the VAT
• State how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown
• Not include the VAT amount in any way
As a customer:
• Check if your supplier has a valid VAT number
• Check your suppliers CIS registration
• Advise your supplier if you are an end user or intermediary supplier
• Make sure your accounting system is set up to deal with the reverse charge
If you receive a reverse charge supply you will have to account for the VAT due on service you have received (by entering in box 1 of your VAT return). This VAT can be reclaimed, subject to the normal limitations, on the same VAT return in box 4.
THE IMPACT OF THE CHANGE
For contractors there are pros and cons there may be cash flow savings because the VAT itself will not need to be paid to the sub-contractor, but VAT accounting becomes more complex. There is possibly a cash flow cost where under the previous rules the VAT paid on unpaid sub-contractor invoices could have been reclaimed from HMRC before the invoice was settled.
The position for sub-contractors may be that they become ‘VAT repayment traders’ where they are continually in a VAT repayment position because their input tax claims exceed their output tax liability due to HMRC. In some cases this could mean that it would be beneficial to switch to monthly VAT returns.
It is important for both contractors and sub-contractors to be aware of the change and how it will affect their VAT accounting from 1 March 2021 as if transactions are treated incorrectly after that date there will be the usual tax and penalty implications.