Construction industry tax changes – VAT and Reverse Charging

The Construction industry scheme (CIS) VAT reverse charge comes into effect from the 01 March 2021 having been deferred twice from October 2019 due to Brexit and the Coronavirus pandemic. The change will affect supplies of construction work for all VAT registered individuals and businesses that report to the HMRC under the CIS.

The new measures are intended to combat missing trader fraud in the construction sector in a similar way to the previously introduced domestic reverse charges for the sale of computer chips and mobile phones.

• Who does this affect?
• Do the new rules affect current contracts?
• Who is not affected?
• What construction services are covered?
• What services are exempt?
• Suppliers covered by the reverse charge rules – what do I need to do?
• Construction service customers – what do I need to do?
• What do I need to do?

Who does this affect?

From the 1 March 2021, if you are a VAT registered business operating under the CIS and supplying construction services to another VAT registered business which is also registered for CIS you will be required to apply the new VAT reverse charge regulations.

The regulations apply where the customer intends to make an ongoing supply of construction services to another party.

The regulations apply to construction services and materials to which a standard or reduced-rate of VAT apply.

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.

The regulations do not apply where the supplier and customer are connected.

The link below to a flowchart from HMRC technical guide is a useful tool in determining when the reverse charge will apply https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/878587/Annex_1_-VAT_domestic_reverse_charge_for_building_and_construction_services.pdf

Who is not affected?

The VAT reverse charge does not apply to:

• supplies of VAT exempt building and construction services
• supplies not covered by the CIS (unless linked to such a supply)
• supplies of staff or workers.
• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.

The VAT reverse charge does not apply to taxable supplies made to the following customers:

• A non-VAT registered customer.
• ‘End Users’ i.e., a VAT registered customer who is not intending to make further on-going supplies of construction.
• ‘Intermediary suppliers’ who are connected, for example, a landlord and his tenant or two companies in the same group.

What construction services are covered?

Services included within the VAT reverse charge comprise all those to which CIS applies including:

• Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations.
• Construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
• 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 and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration.
• Painting or decorating the internal or external surfaces of any building or structure.If there is a reverse charge element in a supply, then the whole supply will be subject to the VAT reverse charge. If there is doubt whether a type of work falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.Do the new rules affect current contracts?For VAT accounting entries before 1 March 2021 where the payment is received on or before 31 May 2021 the normal VAT rules apply.The VAT reverse charge rules apply on all VAT accounting entries on or after 1 March 2021 where the payment is made on or after 1 March 2021.A number of services are excluded from the VAT reverse charge including:
• Which services are exempt?
• Where payment is received on or after 1 June 2021 for VAT accounting entries before 1 March 2021 the new VAT reverse charge rules apply.
• The VAT treatment is determined for payments due on any supplies entered into the VAT accounting system before 1 March 2021 but paid on or after 1 March 2021.
• The contractor is asked to consider all construction contracts with a sub-contractor. If they can see that reverse charge applies to more than 5% of contracts (by volume or value) with that sub-contractor, then the reverse charge may be applied to all the contracts.
• If there has already been a reverse charge service between two parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
• It also applies to services which form an integral part of, preparatory to or completing the above services including site clearance, earth-moving excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

• Drilling for, or extracting, oil or natural gas.
• Extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose.
• Manufacturing building or engineering components or equipment, materials, plant, or machinery, or delivering any of these to site.
• Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site.
• The professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants.
• Making, installing and repairing artworks such as sculptures, murals and other items that are purely artistic.
• Signwriting and erecting, installing and repairing signboards and advertisements.
• Installing seating, blinds and shutters.
• Installing security systems, including burglar alarms, closed-circuit television and public address systems

Suppliers covered by the reverse charge rules – what do I need to do?

Suppliers providing services which are covered by the VAT reverse charge rules will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge and zero rate the output VAT.

VAT reverse charge invoices must include all the information required on a normal VAT invoice however they clearly state the domestic reverse charge applies and that the customer is required to account for the VAT. There is no specific wording but HMRC provide examples of suitable wording: “Reverse charge: VAT Act 1994 Section 55A applies” or” “Reverse charge: Customer to pay VAT to HMRC”.

All businesses required to apply the VAT reverse charge rules should ensure they understand the new rules and consider a change of approach including:

• Training staff to identify relevant CIS contracts, customers and end-users.
• Where necessary obtaining notification from customers that they are an end user and confirmation of their VAT registration and CIS status.
• Check any guidance supplied by the Main Contractor with whom you are in contract.
• Modifying accounting and bookkeeping systems to cope with the new invoicing and reporting obligations.
• Considering how cash flows will be affected and possibly opting to file monthly returns where they may become VAT repayment claimants.
• The VAT Flat Rate Scheme and Cash accounting schemes cannot be used to apply the VAT reverse charge rules – all sales and output VAT to which the VAT reverse charge applies must apply accruals basis to account for these sales.

Construction service customers – what do I need to do?

All customers of construction services should ensure the new rules are fully understood.

The recipient of services to which VAT reverse charge applies must account to HMRC for the VAT due on those supplies through its VAT return. Instead of paying the VAT amount to the supplier the customer must record the VAT as output VAT on its VAT return. The customers will also recover that VAT amount as input tax, subject to the normal rules.

The customer must apply the accruals basis to account for VAT reverse charge on the supplies it receives. This will mean the VAT is recorded on the VAT tax point shown on the supplier invoice and reported and paid to HMRC on the VAT return in which this tax point falls.

The cash accounting scheme will apply to the recovery of input VAT which has been subject to VAT reverse charge.

Customers affected by the VAT reverse charge rules should also consider:

• Training staff to identify relevant CIS contracts and suppliers.
• Modifying accounting and bookkeeping systems to cope with the new recording and reporting obligations.
• Considering how cash flows will be affected and possibly –
  • registering the business for VAT if it is not already registered
  • opting to leave the cash accounting scheme.

If you are affected by the new rules and have any questions or need assistance on the CIS VAT reverse charge rules please contacts our experts:

• • negar.ghaffari@wsm.co.uk
  • simon.marsh@wsm.co.uk
  • carla.love@wsm.co.uk