Flip it and Reverse it: VAT Reverse Charge for Suppliers of Building and Construction Services
From 1 October 2019, a new domestic reverse charge system for VAT will come into effect. This blog will explain how the new system will work and who it will apply to.
The Current System
Under the current rules, a supplier of construction services is liable for the VAT on the supply of goods and services.
In practice, this means that the supplier charges VAT when they bill their customer. Their customer then pays their bill and the VAT to the supplier, who then forwards the VAT payment to HM Revenue & Customs (“HMRC”).
However, there have been increased instances of criminal activity in relation to this, whereby the supplier has gone missing, along with the charged VAT before it is paid to HMRC. Therefore, new preventative rules will apply from 1 October 2019.
The New Rules
Under the new rules, a VAT reverse charge will apply. This will mean that instead of the supplier charging and paying the VAT to HMRC, the recipient of the supplies (the customer) will pay the VAT to HMRC through their VAT return. They will still be able to reclaim the VAT as input tax, in line with the normal rules.
Who Does It Apply To?
The new reverse charge will apply to businesses that supply or receive “specified services” which are reported under the Construction Industry Scheme (“CIS”). These have been broadly defined as building and construction operations for the purposes of CIS and they include:
- Painting and decorating
- Demolition of buildings
- Civil engineering
- The installation of heating, lighting and air-conditioning
The supply of staff or workers is not included.
The reverse charge will be applicable through the supply chain from the point where payments must be reported through CIS to the point where the customer is no longer a business that is making a supply of the above “specified services.”
A business will not have to apply the reverse charge where one of the following applies:
- Services are supplied to an “end user”. This is a business that does not make onward supplies of building or construction services. Common examples of “end users” are property owners, tenants and property developers.
- The recipient of the services makes onward supplies of those construction services to a connected company.
- The recipient of the services is not registered for VAT, nor required to be VAT registered.
- The recipient of the services is not registered for CIS.
- The supplier and recipient are landlord and tenant or vice versa.
- The supplies are zero-rated.
When a business makes a supply of “specified services”, they must provide an invoice to their customer which contains all of the relevant information that would be included on a normal VAT invoice. They must make it clear to their customer that the reverse charge applies and inform the customer that it is their responsibility to account for and pay the VAT to HMRC through their VAT return.
In terms of implementing the new reverse charge, the value of the reverse charge services will not count towards the VAT registration threshold for a business.
What is the Construction Industry Scheme (CIS)? (14 June 2018)
VAT on the Construction of a ‘Pirate Island’ (9 June 2017)
VAT: When do I need to register? (8 November 2016)