VAT: Domestic Reverse Charge For Building And Construction .
VAT:Domestic reverse charge for buildingand construction services
What is the reverse charge?The domestic reverse charge, commonly referredto as the reverse charge, is a major change tothe way VAT is collected in the building andconstruction industry and will affect both suppliersand customers that are both VAT and CISregistered.The changes come into effect on 1 March 2021and means the supplier will no longer charge VATon its specified supplies. The customer receivingthe supplies will be responsible for accounting forand paying any VAT due to HMRC.Services affected by the changesSpecified suppliesThe reverse charge will affect suppliesof building and construction servicessupplied at the standard or reduced ratesof VAT that also need to be reportedunder CIS. HMRC define these suppliesas ‘specified supplies’.There is an important difference betweenCIS and the reverse charge wherematerials are included within a service.The reverse charge will apply to thewhole service whereas CIS paymentsto net status sub-contractors areapportioned and no deductions are madeon the materials content.If any of the services in a supply aresubject to the reverse charge, all otherservices (even if that service would beexcluded if it were being supplied as asingle service) will also be subject to it.If there is any doubt whether a typeof works falls within the definition of aspecified service, as a general rule - aslong as the recipient is VAT registeredand the payments are subject to CIS, thereverse charge should apply.HMRC has provided the following areexamples of the type of services suppliersshould apply the reverse charge to: C onstructing, altering, repairing,extending, demolishing or dismantlingbuildings or structures (whetherpermanent or not), including offshoreinstallation services C onstructing, altering, repairing,extending, demolishing of any worksforming, or planned to form, part ofthe land, including (in particular) walls,roadworks, power lines, electroniccommunications equipment, aircraftrunways, railways, inland waterways,docks and harbours Pipelines, reservoirs, water mains,wells, sewers, industrial plant andinstallations for purposes of landdrainage, coast protection or defence I nstalling heating, lighting, airconditioning, ventilation, power supply,drainage, sanitation, water supply orfire protection systems in any buildingor structure I nternal cleaning of buildings andstructures, so far as carried out in thecourse of their construction, alteration,repair, extension or restoration P ainting or decorating the inside orthe external surfaces of any building orstructure S ervices which form an integral partof, or are part of the preparation orcompletion of the services describedabove - including site clearance,earth-moving, excavation, tunnellingand boring, laying of foundations,erection of scaffolding, site restoration,landscaping and the provision ofroadways and other access worksIt is important to note that the reversecharge does not apply if the service iszero rated for VAT or if the customer isnot registered for VAT in the UK.The reverse charge will also not applyto services supplied to end users orintermediaries and to some otherservices listed below.Examples of services not subject to thereverse charge: D rilling for, or extracting, oil or naturalgas E xtracting minerals (using undergroundor surface working) and tunnelling,boring, or construction of undergroundworks, for this purpose M anufacturing building or engineeringcomponents or equipment, materials,plant or machinery, or delivering any ofthese to site M anufacturing components for heating,lighting, air-conditioning, ventilation,power supply, drainage, sanitation,water supply or fire protection systems,or delivering any of these to site T he professional work of architects orsurveyors, or of building, engineering,interior or exterior decoration andlandscape consultants M aking, installing and repairing artworks such as sculptures, murals andother items that are purely artistic S ignwriting and erecting, installingand repairing signboards andadvertisements Installing seating, blinds and shutters I nstalling security systems, includingburglar alarms, closed circuit televisionand public address systems
End users and intermediariesThe reverse charge does not apply toconsumers or final customers i.e. thosethat do not make onward supplies ofthe building and construction services.These are end users.Any consumers or final customers whoare registered for VAT and CIS, will needto ensure their suppliers do not applythe reverse charge on services suppliedto them by notifying the supplier that theyare an end user.An intermediary supplier is a VAT and CISregistered businesses that is connectedor linked to end users. An intermediarysupplier can also be treated as an enduser when it is the final customer. Tobe connected or linked to an end user,intermediary suppliers must either sharean interest in the same land where theconstruction works are taking place or bepart of the same corporate group.Businesses cannot choose whetherthey are an end user or an intermediarysupplier - it will be a matter of fact.Suppliers that are not sure whether theircustomer is an end user or intermediarysupplier should ask their customer if theyare an end user or intermediary supplierand keep a record of the answer. It willbe up to the customer to notify thesupplier that they are an end user orintermediary supplier and that VAT shouldbe charged in the normal way instead ofbeing subject to reverse charge.Examples of end users include UKVAT registered mainstream or deemedcontractors under CIS rules. They aretypically not construction businesses andare found in the retail, manufacturing,utilities and property investment sectorsas well as public bodies. Propertydevelopers should also be end users incases where they do not make onwardsupplies of building or constructionservices.Employment businessess suppylingconstructions workersEmployment businesses supplyingconstruction workers are not likely tobe considered to be a building andconstruction service for VAT purposes.For VAT purposes such activities ofworkers are supplies of staff by theiremployer and not supplies by the workersthemselves.The important distinction betweensupplying staff and supplyingconstruction services is that the individualworkers are employed or paid by theemployment business and not by theconstruction business that uses them toprovide construction services.ChecklistBusinesses will need to prepare for this change by: Checking whether the reverse charge affects either their sales, purchases or both Contacting regular clients or suppliers to let them know Making sure their accounting systems and software are updated to deal with the reverse charge Consider whether the change will have an impact on their cash flow
ContractsDetermining reverse charge treatment of existingcontracts to be ready for 1 March 2021For businesses that have a variety of contracts, it may bedifficult to establish whether the reverse charge applies ornot in the run-up to 1 March 2021 and afterwards.HMRC has advised that they will accept circumstanceswhere the same VAT treatment has been applied across allcontracts with a particular sub-contractor in the run up to 1March 2021 that continue beyond that date. For example,if the contractor looks across all construction contractswith a sub-contractor and is satisfied that the reversecharge will apply to more than 5% of contracts (by volumeor value) with that sub-contractor, then the reverse chargemay be applied to all the contracts.For contracts starting after 1 March 2021 businessesshould use the reverse charge if it applies from the start ofthe contract.Change of VAT treatment during a contractThere may be contracts where a change in circumstancesmean the reverse charge treatment changes, for examplewhere the customer changes to be the end user or viceversa.Where a contract changes, the customer should notify thesupplier of the change to apply the correct VAT treatment.The new treatment will apply at the point the customer’scircumstances change.Where changes happen during an invoice period, HMRCaccept that the supplier can opt to change to the newtreatment for the entire invoice period or apply the newtreatment to the next invoice period.Suggested amendments to standard contract wordingSuppliers should consider amending standard wordingin their contracts that sets out the VAT treatment of theirsupplies. Example wording: ‘Under the VAT Regulations1995 Section 55A invoices for services subject to thereverse charge where the customer is liable for the VAT’.For contracts with end users suggested wording for thecontract: ‘The customer confirms that it is an end useror connected to an end user for the purpose of VATRegulations 1995 Section 55A’. This will ensure that thesupplier accounts for VAT in the normal way instead andnot subject to reverse charge.
Compliance issuesCompleting your VAT returnTax point spanning 1 March 2021Under the new rules, suppliers will no longer charge VAT ontheir standard or reduced rated supplies of specified servicesto their customers where they are not the end user and areboth CIS and VAT registered. This means that the way in whichVAT is reported on the VAT returns of affected suppliers andcustomers will change as follows:The general rule is that a tax point is the date the transactiontakes place for VAT purposes. However, suppliers of buildingand construction services will usually be seen as providingcontinuous supplies of services for VAT purposes. Thisnormally means VAT is due when a VAT invoice is issued orpayment is received - whichever is earlier. VAT on sales (suppliers)For sales under the reverse charge suppliers must not enterany VAT on sales to which the domestic reverse chargeapplies in box 1 of the VAT return. The net value of the salemust be entered in box 6 (net sales).For invoices issued for specified supplies spanning 1 March2021 that become liable to the reverse charge, the followingVAT treatment will apply: V AT on purchases (customers)Customers purchasing a service subject to the reversecharge must enter the VAT on purchases the domesticreverse charge applies to in box 1 of the VAT return. Makesure you do not enter the net value of the purchase in box 6.Customers may reclaim the VAT on the reverse chargepurchases in box 4 subject to the normal rules. Forcustomers that are fully taxable, the net VAT in most caseswill be nil. The net value of the purchases should beincluded in box 7 as normal. If the tax point is before 1 March 2021 - the normal VAT ruleswill apply and VAT should be charged at the appropriate rate If the tax point is on or after 1 March 2021 - the domesticreverse charge will applyVAT schemesThe new changes will have an effect on the way the cashaccounting scheme and the flat rate scheme operates.Most accounting packages should be able to deal with thereverse charge transactions by posting to a specific tax code.Cash accounting scheme:The cash accounting scheme cannot be used for the supply ofservices that are subject to the reverse charge. This will havean impact on how some businesses manage their accounts.VAT invoices SuppliersIt will be essential for customers to be able to identify whenthe supplier is treating its supplies of goods and servicesunder the new reverse charge. When supplying a servicesubject to the reverse charge, suppliers should: Show all the information required on a VAT invoice, but donot add VAT to the supply Make a note on the invoice to make it clear that the reversecharge applies and that the customer is required to accountfor the VAT. This can simply be a sentence on the descriptionof the goods e.g. ‘Domestic reverse charge applies’ Clearly state how much VAT is due under the reversecharge, or the rate of VAT, if the VAT amount cannot beshown. For businesses that use software to produce invoicesand are unable to show the amount of VAT to be accountedfor under the reverse charge, the wording should state thatVAT is to be accounted for by the customer at the standardor reduced rate of VAT, based on the VAT-exclusive sellingprice for the reverse charge goods or services.Self-billing invoices issued by customers should: Show the supplier’s name, address and VAT registrationnumber (as well as the usual VAT invoice details) Clearly mark the self-billed invoice with the reference selfbilling Clearly state the amount of VAT due under the reversecharge or the rate of VAT if the VAT amount cannot beshown under the reverse charge Include wording on the invoice that shows the domesticreverse charge applies, e.g. ‘Domestic reverse charge: wewill account for and pay the output tax due to HMRC’Under the reverse charge, no VAT is actually paid bycustomers to suppliers, so there will be no additionaladverse cash flow impact for businesses who use cashaccounting.Suppliers can still use the Cash Accounting Scheme forsupplies that are not within the reverse charge. However,suppliers will be required to also account for its purchasesunder the scheme. This may not help with cash flow and sosuppliers may opt to leave the scheme. CustomersUnder normal VAT rules, customers that use the CashAccounting Scheme cannot reclaim VAT charged on suppliesuntil payment has been made to the supplier.Under the new rules, customers that receive services thatfall under the reverse charge will not be charged VAT by thesupplier. Instead, the customer will account for the VAT andrecover it simultaneously on the same VAT Return at the taxpoint and subject to the normal rules.Flat rate scheme:Reverse charge supplies should not be accounted for underthe flat rate scheme. This will mean that users of the schemewill have to consider if it is still beneficial to them when VATis not being paid to them on some or all of the invoices theyissue.Flat rate scheme users who receive reverse charge supplieswill have to account for the VAT due to HMRC.
VAT reverse charge for building and construction servicesThis flow chart can be used to establish whether to normal vat rules apply or whether the domestic reserve chargeshould be used.Q1ARE ANY OF THE SUPPLIES YOU AREMAKING WITHIN THE SCOPE OF CIS?NORMAL VAT RULES APPLYNOYESTHE SUPPLY STANDARD RATED ORQ2 ISREDUCEDRATED?NORMAL VAT RULES APPLYNOYESQ3 IS YOUR CUSTOMER VAT REGISTERED?NORMAL VAT RULES APPLYNOYESYOUR PAYMENT BE REPORTEDQ4 WILLUNDER CIS?NORMAL VAT RULES APPLYNOYESYOUR CUSTOMER PROVIDEDQ5 HASCONFIRMATION THAT IT IS AN END USER?DOMESTIC REVERSE CHARGE VAT APPLIESNOYESNORMAL VAT RULES APPLYContact usMOREI N F O R M AT I O N ?PLEASE GET INTOUCH WTH ONEOF OUR EXPERTSSIMON ANSLOWVAT PARTNERB E C K Y H AY E SINDIRECT TAX OLESALISBURYTAUNTONTORQUAYTRURO0117 403 980001392 66700001752 30101001202 66360001722 33766101823 27592501803 32010001872 276477Please visit our website for your local office expert pkf-francisclark.co.ukIf you wish you be added or deleted from our mailing lists, please update you marketing preferences online at pkf-francisclark.co.uk/update-preferences. You can view ourprivacy policy at pkf-francisclark.co.uk/policies.PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC349116. The registered office isSigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at www.pkf-francisclark.co.uk
Clearly state the amount of VAT due under the reverse charge or the rate of VAT if the VAT amount cannot be shown under the reverse charge Include wording on the invoice that shows the domestic reverse charge applies, e.g. ‘Domestic reverse charge: we will account for and pay th
A Practical Guide to Reverse VAT 1. Contents 2. What is Reverse VAT? 3. Will Reverse VAT affect your business? 4. What is an End User? 5. Commercial End Users 6. Domestic End Users 7. When will Reverse VAT begin? 8. The Current VAT System 9. The New Reverse VAT System 10. Construction services subject to Reverse VAT 11. What else does Reverse VAT apply to? 12. Services NOT subject to .
invoice; make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT; clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT shou
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1. VAT inclusive A The VAT received by a business from sales of goods or income earned. 2. VAT vendor B Payments which are made twice in a month. 3. Input tax C VAT is excluded in the marked price. 4. VAT invoice D Receipts issued by SARS for VAT payments. 5. VAT exclusive E VAT is payable when the
Example notice wording from HMRC is: ‘We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.
We are an end user for the purpose of the Section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice with VAT charged at the appropriate rate. We will not account for the reverse charge. If end user statements are given to
In general, the VAT due equals output VAT less input VAT. As a rule, input VAT may be deducted from output VAT when a taxpayer receives an invoice for goods or services purchased, or in the two subsequent VAT reporting periods. However, to deduct input VAT the
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