VAT – domestic reverse charge for construction services

Published by Colin Laidlaw on 9 November 2018

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HMRC has issued draft legislation and a guidance note in relation to the domestic reverse charge for construction services. Please click here for a link to the guidance note.

What do you need to know?

This change has been introduced to counter fraud in the construction industry and effectively removes the charge to VAT for contractors in the chain of supply.

  • It will start on 1 October 2019
  • It only applies to standard rated and reduced rated supplies although mixed supplies will not need to be split
  • It does not apply to end users
  • It applies to “construction operations” which are subject to the Construction Industry Scheme (CIS). These are set out by HMRC as:

    ○ 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

It also applies to services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in the bullet points above 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.

  • Invoices will need to state that the reverse charge is due

How does it work?

In simple terms the onus to report the VAT rests with the contractors rather than the sub contractors earlier on in the supply chain.

In a simple supply chain the position is as follows:

VAT – domestic reverse charge for construction services 1

From 1 October 2019 this would change to:

VAT – domestic reverse charge for construction services 2

In this scenario the Contractor treats the supply from the sub-contractor as if it was supplied by itself and charges itself VAT (at the standard rate – 20%). Assuming VAT is charged on to the End user, this VAT is recoverable in the normal way.

This reverse charge prevents the sub-contractor from charging VAT and not paying to HMRC.

What do you need to do?

The change does not take effect until 1 October 2019 so there is time to plan but you need to ensure that your systems are set up to report it and recognise when it is applicable (or not).

Talk to your local VAT specialist if you need assistance or call, or email, our specialist VAT team.

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