Having worked with start-up companies for over 50 years, we’ve seen, first-hand, just how essential they are to the development of innovation, technology and new ways of working. Now, more than ever, we're seeing new companies in a range of industries challenging the status quo and serving customers in a way that works today, not simply following what has worked before.
Domestic reverse charge for supplies of building and construction services
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Key points
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What does this mean for you?
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Which supplies are affected?
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Which supplies are excluded?
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Next steps and useful links
The domestic reverse charge for supplies of building and construction services will take effect from 1 March 2021
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//Domestic reverse charge for supplies of building and construction services
The domestic reverse charge for supplies of building and construction services will take effect from 1 March 2021.
Key points
• With effect from 1 March 2021, certain construction industry services supplied to a VAT-registered customer will no longer need to have VAT accounted thereon.
• Instead the customer will account for VAT under a “reverse charge” arrangement. The customer will account for VAT as if he had himself made the supply to himself and will also recover the same VAT as input tax subject to the normal restrictions, etc. The effect is to remove any risk that VAT is reclaimed by one party and not paid over by the other. The new Domestic Reverse Charge applies only to supplies which would otherwise be subject to VAT at the standard or reduced rate. It does not, for example, apply to zero-rated supplies or supplies made by someone who is not VAT registered. The services to which the new rules apply (construction services) are the same services to which the Construction Industry Scheme (CIS) applies. They thus extend not only to construction but to alteration or repair of buildings, some types of electrical and plumbing work, site clearance etc. The new scheme also applies to goods or materials supplied in conjunction with construction services.
The new Building and Construction Domestic Reverse Charge applies only to services that are made to a contractor: it does not apply to an “end user” customer.
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//What does this mean for you? • Subcontractors may need to consider the loss of cash flow. The current opportunity to use VAT to fund cashflowbetween the time it is received from the customer and the time it has to be paid over toHMRC will no longer exist.
• Equally, contractors will no longer suffer a delay between paying out VAT and recovering it, since both will now be dealt with on the same VAT return.
Construction services may be charged at different rates of VAT, being 20%, 5% or 0% dependent upon what work is being undertaken. The onus will now be on the contractor to verify the correct rate to be used for the reverse charge (or if is to be used at all). Before agreeing not to charge VAT on a taxable supply, a supplier of “construction services” will need to be satisfied that the supply falls within the new scheme(and in particular that the customer is a VAT-registered contractor not an end user). It remains to be seen what steps a supplier will be expected to take to verify this or what the position will be should he get it wrong. Main contractors will no longer pay VAT to subcontractors for work they undertake. If a subcontractor does charge VAT incorrectly, HMRC will disallow the VAT reclaim by the main contractor. This is likely to present a major challenge if you’re a main contractor, given the existing difficulty of convincing a subcontractor not to charge VAT on a zero or reduced rated project. After 1 March 2021, you will need to convince subcontractors not to charge VAT at all on their works invoices. The sooner you begin discussing the new scheme with them, the better prepared everyone will be.
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//Which supplies are affected?:-
• Construction, extension, demolition, alteration or repair of buildings or of any works forming part of the land • Installation in any building (whether or not in the course of construction) of a heating, lighting, air conditioning, power, water, drainage etc system • Internal cleaning of buildings (so far as carried out in the course of construction, extension, etc) • Painting or decorating the internal or external surfaces of any building. //Which supplies are excluded?:- • Manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection; • Professional services of architects or surveyors, building consultants etc; • Installation of seating, blinds and shutters; • Installation of security systems such as burglar alarms, closed circuit television and public address systems. Where a supply is zero-rated for VAT purposes (for example most services related to new residential housebuilding) there is obviously no risk to HMRC, so such supplies are not within the new scheme. In addition, where in anymonth the value of supplies made to a particular customer does not exceed £1,000, those supplies fall outside the scheme. The value of supplies within the new scheme scheme does not count towards the VAT registration threshold for the customer which is good news for smaller businesses with a turnover just below the £85,000 VAT registration limit.
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Importantly, the newDomestic Reverse Charge scheme applies only to services which are required to be included in a return of payments under CIS. These returns are made mainly by contractors but could also extend to “deemed contractors”. Deemed Contractors are businesses which spend more than £1m a year on construction operations but do not fall within the scheme as a traditional Contractor of subcontract building services. However, the scheme excludes end users so deemed contractors will usually be outside the scope of the Domestic Reverse Charge Scheme. It will be important both for suppliers and customers to be aware of their responsibilities under the new scheme. Suppliers will need to be confident, before agreeing not to charge VAT, that a customer is in fact a contractor and not an ‘end user’. Customers will need to ensure that a supplier does not incorrectly charge VAT on supplies that ought to fall within the scheme, for such VAT will not be recoverable as input tax. In each case, robust systems will need to be in place to give the necessary confirmations. As Construction services may be charged at different VAT rates dependent upon what work is being undertaken, the onus is on the contractor to verify the correct rate to be used for the reverse charge (or if is to be used at all).
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Next steps and useful links
As a forward-thinking company, we are ambitious on behalf of our clients and recognise the need for supporting companies to understand the changing business landscape.
You can also get some further support for your new business by visiting some of the following:
Government Guidance
Flow Chart // VAT: domestic reverse charge for building and construction services
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// lbgroupltd.com
// lbcorporatefinance.com
// lb-fs.com
// lb-ms.com
// lbinsolvency.co.uk
// lbrecruit.uk
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