EXPLAINED: VAT Domestic Reverse Charge in the Building and Construction Industry

Many of you may have heard about the change in legislation surrounding the way VAT is collected on certain supplies in the building and construction industry and be thinking ‘How will the VAT Reverse charge affect me?’ or ‘How can I plan for the VAT domestic reverse charge change?’

In an attempt to combat missing trader fraud, HMRC will introduce changes to the VAT rules on certain supplies made within the UK construction industry. The changes will have a substantial effect on VAT compliance and cash flow. Therefore, it is important to plan for this before the deadline. Taking steps to establish what supplies will be affected and reviewing current contracts and systems are just a few of the things that ought to be considered how they will be impacted by the change.

Here is a list of the key points worth knowing:

When does this change come into play?

The mandatory changes will come into effect from 1 October 2019, but HMRC recognise their will be challenges encountered under the new rules, so they will be operating a ‘light touch’ policy on genuine mistakes and penalties for the first 6 months.

Who does VAT domestic reverse charge apply to?

The Domestic Reverse Charge will only apply to VAT-Registered business who are enrolled with and report payments through the Construction Industry Scheme (CIS). This means it will affect the majority of services supplied between sub-contractors and contractors.

What supplies are affected by the Domestic Reverse Charge?

The legislation will apply to construction operations as defined in CIS, but the reverse charge applies to the whole service which includes materials. It will apply to the following building and construction services at either standard or reduced rate VAT (but is not limited to):

• Construction, extension, demolition, alteration or repair of buildings
• Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection.
• Internal cleaning of buildings
• Painting or decorating of all building

Are there any supplied excluded from the Domestic Reverse Charge?

Provisions of the following supplies are not covered by the domestic reverse charge if supplied on their own (but is not limited to):

• Manufacturing of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site.
• The professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape.
• The making, installation and repair of artistic works, being sculptures, murals and other works, which are wholly artistic in nature.
• The installation of security systems, including burglar alarms, closed circuit television and public address systems.
• Sign writing and erecting, installing and repairing signboards and advertisements.

What about mixed supplies?

The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is designed to make it simpler for both the supplier and customer, and to avoid the need to apportion or split out the supply. If in doubt, and the recipient is VAT registered, and the payment is subject to CIS, you should apply the reverse charge.

How does the change effect VAT return forms?

Suppliers must not enter in box 1 of the VAT Return any output tax on sales to which the domestic reverse charge applies but must enter the value of such sales in box 6.

Customers must enter in box 1 of the VAT Return the output tax on purchases to which the domestic reverse charge applies but must not enter the value of such purchases in box 6. They may reclaim the input tax on their domestic reverse charge purchases in box 4 of the VAT Return and include the value of the purchases in box 7, in the normal way.

What changes do you need to make to invoices?

Where the Domestic Reverse charge applied suppliers must:

• show all the information normally required to be shown on a VAT invoice
• annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for the VAT.

The amount of VAT due under the domestic reverse charge should be clearly stated on the invoice but should not be included in the amount shown as total VAT charged.

Summary

As you can see there are several points you need to consider, so it is best to be comfortable with these changes now and communicate with any contractors and sub-contractors you frequently use to ensure they are also aware and understand the new regulations.

For more information, see the government guidance using this link: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services or download our useful flyer by clicking here.

For more in depth advice please attend one of our FREE Seminars, running on the 13^th and 28^th August 8am – 9am or contact our VAT expert, David Barraclough, directly on david.barraclough@wrightvigar.co.uk.