New VAT Rules

Reverse Charge for Building & Construction Services

From the 1st October 2019, the way in which VAT is collected and paid to HMRC will change. These changes are known as the Construction Reverse Charge or the Domestic Reverse Charge.

The changes have been introduced as a tool to prevent the VAT losses that arise when suppliers fail to pay to HMRC the VAT which has been collected. The new rules are not supposed to create any VAT losses for contractors but as with any changes to VAT rules, there are adverse and perhaps unexpected consequences. The impact on a sub contractors cash flow position is the main disadvantage anticipated to arise from the changes.

The reverse charge applies to all supplies of building or construction services which to date have been subject to standard (20%) or reduced (5%) rates and are reportable under the Construction Industry (CIS) reporting requirements.

Broadly, the new rules require a sub-contractor who makes a construction related supply to a VAT registered business to issue an invoice, but without charging or collecting VAT at the usual rates noted above. The main contractor will in return, notionally charge the VAT on that supply to itself, recovering this as input tax in accordance with the usual rules for input tax recovery. When the contractor raises an invoice to the end customer, it will charge VAT as normal.

A general list of activities that fall within the new VAT rules has been provided within HMRC's guidance. Although a sweeping statement, any activities that fall within the CIS rules should be considered to fall within the new VAT reverse charge rules. However, a number of services that have been expressly excluded are:

  • drilling for, or extraction of, oil or natural gas;
  • extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose;
  • manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site;
  • manufacture 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;
  • sign-writing and erecting, installing and repairing signboards and advertisements;
  • the installation of seating, blinds and shutters;
  • the installation of security systems, including burglar alarms, closed circuit television and public address systems.

In addition to the services listed above, there are a number of circumstances which are 'excepted' from the reverse charge rules (this list is not exhaustive). VAT is charged by the supplier as usual on:

  • Supplies to an "end user". An end user is a taxable person who does not make supplies of construction services.
  • Supplies to an intermediary supplier where there is a connection between the intermediary supplier and the end user or where they both have a relevant interest in the land, buildings or civil engineering works specified services.
  • Supplies in respect of property used for the customer's business (property built by commercial property developers would not fall within the 'used for the customer's business' definition).
  • Where the customer is established for charitable purposes only or not VAT registered (charities are generally subject to standard rate VAT unless relevant charities use rules apply).
  • Supplies are zero rated - i.e. VAT remains chargeable at 0%.

Other points to be aware of:

If there is a reverse charge element in a supply, then the whole supply will be subject to the domestic reverse charge including the cost of materials even though materials would typically be excluded from CIS deductions.

If there has already been a domestic reverse charge supply on a construction site and if both parties agree (e.g. to avoid having to apportion services), the new domestic reverse charge will apply to all subsequent supplies on that site between the two parties.

HMRC’s guidance suggests that it is the end user’s responsibility to make the supplier aware that they are an end user and that VAT should be charged in the normal way instead of being reverse charged. This should be stated in writing in order for the end user to avoid being responsible for applying the reverse charge. Suggested wording has been provided:

'We are an end user with regard to the VATA 1994, s55A reverse charge for building and construction services. Please issue a normal VAT invoice, with VAT charged at the appropriate rate. We shall not be accounting for the VAT reverse charge.'

Invoices issued under the reverse charge rules are required by law to include a reference to 'reverse charge'. HMRC suggested wording for this purpose is - 'Reverse charge: VAT Act 1994 Section 55A applies'

The customer/contractor does not enter the purchase in its sales in Box 6 of its VAT return but does need to declare the notional VAT charge in box 1 of the Return. The sub contractor does not charge VAT and so there is no entry to be included in box 1 but does need to include the value of the supply in box 6 of its VAT return.

Provided that a demonstrable attempt has been made to apply the new rules correctly, no penalties will be charged for inaccuracies that arise in the first six months.

The Chartered Institute of Tax has requested a delay to the implementation of the rules to help ensure that the industry has the time and awareness to apply the rules correctly. Whether or not any delay is agreed, you should prepare for the 1 October.

I am a subcontractor, what should I be doing now?

  1. Consider whether any ongoing contracts fall within the remit of the construction reverse charge and request the necessary certification from the main contractor.
  2. Verify the VAT registration of the main contractor to ensure that they are appropriately VAT registered. This can be done at http://ec.europa.eu/taxation_customs/vies/
  3. Consider whether any contracts that will be entered into after the 1 October fall within the reverse charge rules and request necessary certification from the outset.
  4. Update cash flow forecasts from 1 October to reflect the lower payments to be received from the main contractor.
  5. Don't forget to ensure that the reverse charge rules are applied to your own sub contractors as appropriate. Incorrectly charged VAT is irrecoverable from HMRC.
  6. Update your invoices to include the necessary reverse charge declaration.
  7. Ensure that your MTD compliant bookkeeping software is ready and able to make the necessary reverse charge entries within VAT Returns from 1 October.
  8. If VAT repayments are likely to arise when VAT Returns are prepared, consider whether monthly VAT Returns would help to ease the cash flow burden caused by the new rules.

I am a main contractor, what should I be doing now?

  1. Consider whether any ongoing contracts fall within the remit of the construction reverse charge and request the necessary End User certification from the customer. Update contracts if appropriate.
  2. Consider whether any contracts that will be entered into after the 1 October fall within the reverse charge rules and provide the necessary certification to subcontractors from the outset.
  3. Ensure that controls are put in place to deal with services that fall within or outside of the reverse charge rules so that VAT is paid accordingly.
  4. Ensure that your MTD compliant bookkeeping software is ready and able to make the necessary reverse charge entries within VAT Returns from 1 October.

This is a summary of a complex area of VAT and does not constitute formal advice.

Specific advice should always be taken on each occasion.

Need support or further information?

If you need help and support preparing for this change or further advice on any of the above please contact:

Martin Knight, BPU Director
Email: martink@bpuaccountants.co.uk or call 029 20734100
www.bpuaccountants.co.uk

Home | Contact us | Accessibility | Disclaimer | GDPR (including Standard Terms of Business) | Help | Site map |

© 2019 BPU Accountants. All rights reserved.

We use cookies on this website, you can find more information about cookies here.


BPU Chartered Accountants is the trading name of BPU Ltd Company number 3723948 registered in Wales. Registered to carry on audit work in the UK and Ireland and regulated for a range of investment business activities by the Institute of Chartered Accountants in England and Wales.

BPU Financial Solutions Ltd is an Appointed Representative of ValidPath Limited which is authorised and regulated by the Financial Conduct Authority. ValidPath Limited is entered on the Financial Services register (www.fca.org.uk/register) under reference 197107.

BPU Accountants, Radnor House, Greenwood Close, Cardiff Gate Business Park, Cardiff CF23 8AA
BPU Accountants, The Counting House, Pound Field, Llantwit Major, Vale of Glamorgan CF61 1DL