Major VAT Changes for the Construction Industry
Update: This has now been delayed until 1/10/2020. Find out more here.
1st October 2019 marks the introduction of the Construction Services Domestic Reverse Charge (CSDRC). The new rules are intended to counter what HMRC describes as ‘missing trader fraud’, where a trader reclaims VAT on purchases which the supplier has no intention of paying over to HMRC.
This ‘missing trader fraud’ is countered by shifting the responsibility for accounting for the VAT from the subcontractor (the supplier) to the contractor (the customer). Instead of paying VAT over to the subcontractor, the contractor will now be liable to account for the VAT on their VAT return and then recover the same amount, subject to the normal rules. Whilst these entries basically cancel each other out, they remove the risk of HMRC assigning credit for VAT which they will never receive.
The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK. It also does not apply to some services.
Services subject to the reverse charge
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services.
- Constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours.
- Pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
- 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 inside or the external surfaces of any building or structure.
- Services which form an integral part of, or are part of the preparation or completion of the services described 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.
Services not subject to the reverse charge
- 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 art works 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
It is important to note that if any of the services in a supply are subject to the reverse charge, then all other services (whether subject or not in their own right) will also be subject to it.
The CSCRS only applies to construction services made to a contractor, where there is an onward supply of the service, not to an end user (someone buying construction services for their own use rather than to sell on). The subcontractor will then be required to issue a VAT invoice stating which services are subject to CSDRC and stating, ‘customer to account to HMRC for the reverse charge output tax on the VAT-exclusive price of items marked reverse charge’.
It will be important for both sides to be aware of their responsibilities under the CSDRC. Subcontractors will need to be confident the customer is a contractor and not an end user, and as such If you supply a service subject to reverse charge, you will no longer need to account for VAT on that service. Contractors need to ensure their subcontractors do not incorrectly charge VAT that ought to fall within the scheme, instead, you will account for the VAT and recover it simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.
Because of the reverse charge some businesses may find that, as they no longer pay the VAT on some sales to HMRC, their VAT return will result in a repayment rather than a payment to HMRC, and as such HMRC will accept moving to monthly returns to speed up payments due from them.
Completing your VAT Return
VAT on sales – for sales under the reverse charge, suppliers must not enter any output tax on sales which the reverse charge applies to in box 1. The net value of the sale must be entered in box 6.
VAT on purchases – For purchasing services subject to the reverse charge, you must enter the output tax on purchases which the reverse charge applies to in box 1, making sure not to enter the net value in box 6. You may then reclaim the input tax on reverse charge purchases in box 4, subject to the normal VAT rules, and enter the value of the purchases in box 7 as normal.
If you have any questions in relation to the changes raised in this post, please contact our team of VAT specialists who can help you to understand how this affects you.
Please note: This article is a commentary on general principles and should not be interpreted as advice for your specific situation.