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Reverse charge VAT for the construction industry

A change to the VAT system was set to take place on 1 October 2019 – but that’s now been pushed back to 2020.

The news was welcomed by campaigners, who had argued that contractors and subcontractors in the construction industry needed more time to prepare.

The Chartered Institute of Taxation said it hopes the delay will “lessen the likely flurry of disputes between suppliers and customers as to whether or not VAT should be charged”.

That doesn’t mean the change is cancelled altogether, however, and businesses still need to prepare before it comes in on 1 October 2020.

Here’s what’s changing, and what it could mean for you.

Specified supplies

The reverse charge will apply to specified supplies of building and construction services supplied at standard or reduced rates that also need to be reported under the construction industry scheme (CIS).

There are certain services that are not included, and it’s not always obvious which ones are affected by the reverse charge, and which ones are not.

For example, the work of architects or surveyors does not come under the reverse charge. Neither does installing seating, blinds and shutters, or making and repairing works of art such as sculptures or murals.

How it works

The reverse charge will apply to transactions between contractors who turn over more than £85,000 a year and subcontractors registered under the CIS.

For the purpose of an example, view the subcontractor as a supplier of a construction service and the contractor as their customer.

Currently, the supplier of a construction service will include VAT on their invoice to their customers and is responsible for paying it to HMRC.

From 1 October 2020, the supplier will notify the customer that the service is subject to the reverse charge, and the customer receiving the service will be responsible for handling and paying the VAT element to HMRC. They will be able to claim this back as input tax.

The customer at the end of the supply chain, who doesn’t provide construction services, is exempt from the reverse charge so normal VAT rules will apply on invoices to them.

HMRC has provided a flowchart to help businesses and contractors work out whether the reverse charge applies to them – but if you’re still not sure, talk to us.

What you need to do

You have an extra year to prepare, but that doesn’t mean you should forget about reverse charge VAT for construction services until April.

Those affected have been advised to prepare by checking how the reverse charge will affect their sales and purchases, assessing its impact on cashflow, making sure their accounting software is updated to deal with the change and that staff know what they need to do.

After October 2020, for each new contract you should find out whether the reverse charge applies. For example, is the customer an end user or intermediary supplier? And are they VAT and CIS-registered?

It would also be wise to determine the statuses of current contracts. If the reverse charge applies to more than 5% of your contracts, you could simply apply it to all of them – but check with us about this first.

Talk to us

We have years of experience working with construction businesses, and can help you to apply the reverse charge, as well as advising on any other industry-specific issue.

 Get in touch for advice.