Reverse charge VAT for construction services

Reverse charge VAT delayed

Reverse charge VAT for construction services is scheduled to come in from 1 October 2020.

This was originally planned to come in 12 months’ earlier, and just six months after MTD for VAT.

The new measure will apply to any work that falls within the construction industry scheme (CIS).

Jobs covered under the CIS include site preparation, alterations, dismantling, construction, repairs, decorating, and demolition.

Work on plant and machinery is excluded from the scheme. So, for example, the rules will not apply if you attend a property to fix a dripping tap.

What is reverse charge VAT?

Reverse charge VAT for construction services applies to transactions between VAT-registered contractors and subcontractors registered under the CIS.

For example, a subcontractor supplying construction services to a VAT-registered contractor will not have to handle or pay VAT.

Instead, the VAT-registered contractor will assume responsibility for handling and paying the VAT element to HMRC.

VAT-registered companies, partnerships and sole traders in the building and construction sector will be affected from 1 October 2020.

The rules apply to both standard and reduced-rate VAT supplies, but not zero-rated supplies.

Why are the rules being introduced?

The measure aims to crack down on instances where contractors charge VAT for construction services they supply, only to not pay the VAT to HMRC.

HMRC believes contractors doing this have been taking 5% or 20% extra profit, depending on the rate of VAT due.

By shifting the reverse charge down the supply chain, the Revenue hopes to eradicate this type of fraud.

Is your business ready?

The Revenue is urging those affected by the rules to get their houses in order over the coming weeks.

Research from the Federation of Master Builders in July 2019 found 69% of construction sector SMEs had not heard of reverse charge VAT.

“We are concerned about a substantial lack of awareness and a lack of preparedness, even among those businesses that are aware of the measures,” said Linda Skilbeck, vice-chair of the Chartered Institute of Taxation indirect taxes sub-committee in response to the research.

“There will be confusion leading to disputes between suppliers and customers as to whether or not VAT should be charged.”

These concerns led to the Government delaying the measure by 12 months.

Those affected by the new measure should ensure their accounting software deals with suppliers’ invoicing needs.

Consider including a comment on an invoice about reverse charge VAT applying to the sum of VAT to be declared.

“Businesses may be unprepared for the cashflow implications of the reverse charge, potentially leading to financial difficulties,” added Skilbeck.

Light-touch to penalties

HMRC also anticipates difficulties and, as long as you try to comply with the new rules, you will not be penalised for any errors in the first six months.

Those affected that act in good faith will have until 1 April 2021 to get to grips with the rules.

That said, the Revenue may penalise those who deliberately do not account for VAT correctly.

Get in touch

If you’re VAT-registered, working in construction or building and worried about reverse charge VAT, fear not.

Our bookkeeping service can take care of VAT obligations, and advise on which construction services are included and excluded.