Domestic Reverse VAT Charge for Building and Construction Services

Domestic Reverse VAT Charge for Building and Construction Services

Croner-i have provided the following notes regarding the new rules:

Overview

The domestic reverse charge (referred to as the reverse charge) is a major change to the way VAT is collected in the building and construction industry.

It comes into effect on 1 March 2021 and means the customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier.

It will only apply to individuals or businesses registered for VAT in the UK (although it will not apply to consumers).

This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).

What you need to do to be ready for the start of the domestic reverse charge

You need to prepare for the 1 March 2021 introduction date by:

• checking whether the reverse charge affects either your sales, purchases or both
• making sure your accounting systems and software are updated to deal with the reverse charge
• considering whether the change will have an impact on your cashflow
• making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

What contractors need to do

If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.

What sub-contractors need to do

If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.

Find out more about end users and intermediary supplier businesses.

Watch the recorded webinar about the new VAT reverse charge for construction services.

Services affected by the domestic reverse charge

The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies.

There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.

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. These are those supplied to end users or intermediaries connected with end users. Find out more found in the End users and intermediary supplier businesses section.

Employment businesses who supply staff and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge. Read the Applying the domestic reverse charge for construction services to certain sectors or types of transactions section for more information.

You will have to apply the reverse charge if you supply any of these services:

• 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 excluded from the domestic reverse charge

The following services are 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

How the domestic reverse charge works

The reverse charge means the customer receiving the specified service has to pay the VAT to HMRC instead of the supplier. In turn the customer can recover the VAT, subject to the normal rules for VAT recovery.

How the domestic reverse charge will affect you

HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

Any errors need be corrected as soon as possible, as the longer under declared or overcharged sums remain outstanding the more difficult it may be to correct or recover them.

HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.

Monthly returns

As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment).

Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.

The best time to move to monthly returns will depend on the business and whether they want to have monthly returns from March, or to delay a little to offset some of the VAT they owe to HMRC on periods spanning 1 March.

For example, if a customer submits a quarterly return up to 28 February 2021 and requests a change to monthly returns on 14 April 2021, March will be a monthly return and the return periods from then on will be monthly.

If the request is made in May 2021, March and April would be a 2 month return with monthly returns from then on.

Services with reverse charge and non-reverse charge elements

If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.

Supply and fix works will be subject to the reverse charge. For example, a joiner constructing a staircase offsite then installing it onsite is making a reverse charge service, even if the charge for installation is only a minor element of the overall charge.

In addition, if there has already been a reverse charge service between 2 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.

If there is doubt whether a type of works 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.

Determining reverse charge treatment of existing contracts to be ready for 1 March 2021

For some businesses with large numbers of active contracts with sub-contractors at a variety of sites, it may be difficult to establish whether the reverse charge applies or not in the run-up to 1 March 2021 and afterwards.

For example, on some sites a construction group may be a property developer and on other sites a building contractor, and on both sites their status could change.

To avoid uncertainty and delay to payments whilst each contract is checked HMRC recognises that it will be easier if one VAT accounting treatment is given to all contracts with a particular sub-contractor.

So, if the contractor looks across all construction contracts with a sub-contractor and 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.

For contracts starting after 1 March 2021 you should decide whether the reverse charge applies from the start of the contract.

End users and intermediary supplier businesses

End users

The reverse charge does not apply to consumers or final customers of building and construction services. Any consumers or final customers who are registered for VAT and CIS will need to ensure their suppliers do not apply the reverse charge on services supplied to them, find out more in the Asking customers about end user or intermediary status section.

For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.

Intermediary suppliers

Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end users.

To be connected or linked to an end user, intermediary suppliers must either:

• share a relevant interest in the same land where the construction works are taking place
• be part of the same corporate group or undertaking as defined in section 1161 of the Companies Act 2006

Reverse charge treatment of end users and intermediaries

The concept of intermediary suppliers means that if a number of connected businesses are collaborating together to purchase construction services, they are all treated as if they are end users and the reverse charge does not apply to their purchases.

For example, a property-owning group may buy construction services through one member of the group and recharge those services to either other group companies, their tenants or both. All the members of the property owning group and their tenants will be end users and the reverse charge should not apply.

Landlords, lessors, licensors, tenants, lessees or licensees and any persons “connected” to them have a relevant interest in land. Having an agreement for lease is also a relevant interest in land. However, having a relevant interest in land does not include temporary rights to occupy land to carry out building and construction services.

You cannot choose whether you are an end user or an intermediary supplier because it is a matter of fact.

Asking customers about end user or intermediary status

You may not be sure whether you are supplying a customer who is an end user or intermediary supplier. In this situation, you should ask the customer if they are an end user or intermediary supplier and keep a record of the answer. It will be up to the customer to make the supplier aware that they are an end user or intermediary supplier and that VAT should be charged in the normal way instead of being subject to reverse charge.

Sometimes it may be obvious that the customer is an end user, for example if there is a repeat contract, and it will be acceptable for you to charge VAT in the normal way.

Examples of end users include UK VAT registered mainstream or deemed contractors under CIS rules. They are typically not construction businesses and are found in the retail, manufacturing, utilities and property investment sectors as well as public bodies. Property developers should also be end users in cases where they do not make onward supplies of building or construction services.

Intermediary suppliers can call themselves end users in all communications which should be in writing (either digitally, or on paper). There is no set wording, but this is an example of suitable wording:

“We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”

If the reverse charge treatment depends on the customerʼs end user status and the treatment adopted is found to be incorrect (for example, because the customer is an end user but has not provided written confirmation resulting in the reverse charge being applied incorrectly) HMRC will expect the customer to notify the supplier that it is an end user and request a corrected invoice.

In the case of self-billing, a new invoice will have to be issued and the VAT will have to be paid to the supplier.

When to check if your customer is VAT and CIS registered or an end user

Some businesses contract with a lot of customers who are consumers of construction services. For example, some energy utilities provide heating installation and maintenance services to home and property owners through their websites and hotlines.

Where sales networks are clearly set for consumer sales it is not necessary to check the VAT, CIS or end user status of the customer and the normal VAT rules should apply.

If you are sure your customer is an end user because you have provided similar services under the same sort of contract before, and you believe that the customerʼs status is unchanged, you can apply normal VAT treatment without asking the customer to confirm they are still an end user.

For businesses that often deal with end users, a practical way of dealing with the question of end user status is for the business to include a statement in their terms and conditions to say they will assume that their customer is an end user unless they say they are not. This places a responsibility on the customer to respond if this is not the case.

Verifying the VAT status of customers

Before you can apply the reverse charge, you need to be satisfied that your customer is VAT registered. You can check that your customerʼs VAT number is valid and belongs to them on the European Commission website.

Verifying CIS registration of customers

You do not need to verify the CIS registration of existing customers if your contract is within CIS (but you should keep evidence of this where you have it, such as a deductions certificate as part of your VAT records).

You should ask new customers to provide details of their registration as a contractor for CIS purposes, or a copy of their CIS verification of you, and retain these.

However, if you are registered for CIS as a contractor HMRC recommends you use the CIS verification system. You will still be asked to confirm that you have placed an order with a sub-contractor before completing the verification, but for VAT purposes you can confirm this even though an order has not been placed by you.

You can complete the CIS verification system using:

• the free HMRC CIS online service
• commercial CIS software

Youʼll need the following customer details to complete the check.

Sole trader:

• name
• unique taxpayer reference
• National Insurance number

Partner in a firm:

• firmʼs name
• partnerʼs name
• firmʼs unique taxpayer reference
• partnerʼs unique taxpayer reference, or partnerʼs National Insurance number – if the partner is an individual
• companyʼs unique taxpayer reference or registration number – if the partner is a company

Company:

• name of company
• companyʼs unique taxpayer reference
• company registration number

Change of VAT treatment during a contract

There may be contracts where a change in circumstances mean the reverse charge treatment changes. For example, if a customer no longer retains an interest in the land concerned, or a property developer sells a partly completed building (sometimes called a sale at “golden brick” stage) and carries on supplying the construction services to the new owner to complete the building.

In these examples the customer should notify the supplier that the end user exclusion no longer applies and charges for services in future would be subject to reverse charge.

The new treatment will apply at the point the customerʼs circumstances changed.

If this change happens during an invoice period (where there would be one invoice including both reverse charge and normal VAT rules), the supplier can opt to change to the new treatment for the entire invoice period or wait until the next invoice period before changing to the new treatment.

What a tax point is

A tax point is the date the transaction takes place for VAT purposes.

Providing building and construction services is usually seen as continuous supplies of services for VAT purposes. This normally means VAT is due when a VAT invoice is issued or payment is received (whichever is earlier).

Find out more about the tax point rules for construction services in VAT Notice 708: buildings and construction.

Single payment contracts

If the building and construction service you are providing is under a single payment contract, the tax point is the date that the service is performed or completed.

However, if you issue a VAT invoice or receive payment before the service is performed or completed, VAT is due on the date of the invoice or receipt of payment (whichever is earlier).

If you issue a VAT invoice within 14 days of the service being performed or completed, VAT is due on the date of the invoice.

Find more information about tax points in Notice 700.

For invoices issued for specified supplies spanning 1 March 2021 that become liable to the reverse charge, the VAT treatment for invoices with a tax point:

• before 1 March 2021 – the normal VAT rules will apply and you should charge VAT at the appropriate rate on your supplies
• on or after 1 March 2021 – the domestic reverse charge will apply

Transitional supplies for authenticated tax receipts or self-billed invoices

For authenticated tax receipts or self-billed invoices the tax point is normally the date the supplier receives payment.

The table below explains the transitional arrangements for how the VAT treatment is determined for payments due on any supplies entered into your accounting system before 1 March 2021, but paid on or after 1 March 2021.

Date entered in customerʼs accounting system	Date payment made	VAT Treatment
Before 1 March 2021	On or before 31 May 2021	Normal VAT rules
Before 1 March 2021	On or after 1 June 2021	Domestic reverse charge
On or after 1 March 2021	On or after 1 March 2021	Domestic reverse charge

Retention payments

The tax point for the retention element of the contract is delayed until payment is received or a VAT invoice has been issued for it (whichever is earlier).

The treatment of VAT for retention payments is covered in the main What a tax point is section.

Cash Accounting Scheme

The Cash Accounting Scheme cannot be used for the supply of services that are subject to the reverse charge.

This will have an impact on how some businesses manage their accounts. However, under the reverse charge, no VAT is actually paid by customers to suppliers, so there will be no additional adverse cash flow impact for businesses who use cash accounting.

Instead it is the customer who accounts for the VAT directly to HMRC. They can reclaim that VAT simultaneously on the same VAT Return, subject to the normal rules on VAT input tax deduction.

Sub-contractors making reverse charge supplies

If you supply a service subject to reverse charge, you will no longer need to account for VAT on that service.

You can still use the Cash Accounting Scheme for supplies that are not within the reverse charge. However, youʼll have to use cash accounting for your purchases so you may find that the Cash Accounting Scheme no longer helps your cash flow. If this is the case, you can withdraw from the scheme.

Contractors receiving reverse charge supplies

Under normal VAT rules, if you receive construction services and use the Cash Accounting Scheme you cannot reclaim the VAT on the supply of that service until you have paid your supplier.

From 1 March 2021, if you receive services that fall under the reverse charge your supplier will no longer charge you VAT. 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.

This accounting should be done on either the date of your supplierʼs invoice or the date on which you pay your supplier, whichever comes first. Read the What a tax point is section for more information.

Businesses that currently account for VAT on the basis of payments made and received

HMRC recognises that many small businesses in the construction sector prefer to account for their VAT on the basis of payments made and received.

The reverse charge will bring in the following changes.

Sales

For sales, no VAT will be due on payments from customers where the supply is covered by the domestic reverse charge.

All you need to do is include the value of the sale in box 6 of your VAT Return when you receive the payment.

If you supply services that are not subject to the reverse charge (for example to private individuals or end users), you must account for VAT on the dates you were paid.

Purchases

If you receive a service subject to the reverse charge from sub-contractors you will have to account for the VAT in box 1 of your VAT Return and recover it simultaneously on the same VAT return, subject to the normal rules on VAT input tax deduction

You can account for this on the date you make the payment to your sub-contractor, unless they have issued you with a tax invoice beforehand, in which case you should account for the VAT using the date of the invoice.

Flat Rate Scheme

Reverse charge supplies are not to be accounted for under the scheme. Therefore, users of the scheme will have to consider if it is still beneficial to them when VAT is not being paid to them on some or all of the invoices they issue.

Flat Rate Scheme users who receive reverse charge supplies will have to account for the VAT due to HMRC.

Completing your VAT Return

VAT on sales

For sales under the domestic reverse charge suppliers must not enter any output tax on sales to which the domestic reverse charge applies in box 1 of the VAT Return. The net value of the sale must be entered in box 6.

VAT on purchases

If you are purchasing a service subject to the reverse charge, you must enter the output tax on purchases the domestic reverse charge applies to in box 1 of the VAT Return. Make sure you do not enter the net value of the purchase in box 6.

You may reclaim the input tax on your domestic reverse charge purchases in box 4 subject to the normal rules, and you should enter the net value of the purchases in box 7 as normal.

VAT documents

A VAT document is either a VAT invoice issued by the supplier or an authenticated tax receipt or a self-billing invoice issued by the customer.

Invoices

When supplying a service subject to the domestic reverse charge, suppliers must:

• show all the information required on a VAT invoice
• make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT
• clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but that VAT should not be included in the amount charged to the customer

If you use software to produce your invoices, and your system cannot show the amount of VAT to be accounted for under the reverse charge, then the wording should state that VAT is to be accounted for by your customer at the standard or reduced rate of VAT, based on the VAT-exclusive selling price for the reverse charge goods or services.

But your customer must be able to identify the reverse charge goods or services, and a legend such as “customer to account to HMRC for the reverse charge output tax on the VAT-exclusive price of items marked reverse charge” should be shown on the invoice.

Under the VAT Regulations 1995 invoices for services subject to the reverse charge where the customer is liable for the VAT must include the reference “reverse charge”. Here are some examples of wording that meet the legal requirement:

• reverse charge: VAT Act 1994 Section 55A applies
• reverse charge: S55A VATA 94 applies
• reverse charge: Customer to pay the VAT to HMRC

Authenticated tax receipt and self-billing invoices

Authenticated tax receipts or self-billing invoices issued by customers must:

• show the supplierʼs name, address and VAT registration number (as well as the usual VAT invoice details)
• clearly mark the self-billed invoice with the reference self-billing
• clearly state the amount of VAT due under the reverse charge or the rate of VAT if the VAT amount cannot be shown under the reverse charge

Here are some examples of wording that can be included on these documents:

• reverse charge: we will account for and pay the output tax due to HMRC
• reverse charge: as the UK customer we will pay the VAT due to HMRC

How to deal with adjustments

Adjustments in the course of business

If a supplier allows a credit to a customer who can reclaim all the tax on their supply as input tax, you do not have to adjust the original VAT charge as long as both the supplier and customer agree not to do so. If these conditions are met this concession can also apply to reverse charge supplies.

Otherwise, the following adjustments will need to be made:

Suppliers

Issue a credit note to the customer with a note on it to show that the reverse charge applies and showing the reduction in the VAT the customer has to pay to HMRC.

Here are some examples of wording you can use for credit notes:

• reverse charge: customer to account for the output tax adjustment of £X to HMRC
• reverse charge: UK customer to account for the output tax adjustment of £X to HMRC
• customer to account to HMRC for the adjustment to reverse charge output tax on the VAT exclusive price of items marked reverse charge (use this if the VAT amount cannot be shown).

Include the reduction in the value of the supply in box 6 of the VAT Return for the period in which the credit note is issued.

Customers

Adjust the amount of output VAT due (as shown on the supplierʼs credit note) by reducing the total VAT due in box 1 of the VAT Return for the period in which the credit note was issued.

Adjust the amount of input VAT in box 4 of the same VAT Return, in accordance with any input tax adjustment calculations that apply (for example partial exemption methods).

Include the reduction in the value of the supply in box 7 of the VAT Return for the period in which the credit note is issued.

If the original supply was accounted for under a self-billing or authenticated receipts system then it will be for the customer rather than the supplier to generate the credit note, but otherwise the same procedure will apply.

If you have not submitted your VAT Return

If you identify a change in the value of reverse charge services before your accounting period is closed, you can adjust your primary records of the sale or purchase and make sure the corrected figure feeds through to the VAT account.

Applying the domestic reverse charge for construction services to certain sectors or types of transactions

Employment businesses supplying construction workers

As explained in the Specified supplies section, employment businesses supplying construction workers are not likely to be considered to be a building and construction service for VAT purposes.

For VAT purposes such activities of workers are supplies of staff by their employer and not supplies by the workers themselves. Therefore, the supplier makes a supply of staff for VAT purposes if, for a consideration, it provides another person with the use of an individual who is:

• contractually employed or otherwise engaged by the employment business
• is a director of the employment business

The important distinction between supplying staff and supplying construction services is that the individual workers are employed or paid by the employment business and not by the construction business that uses them to provide construction services.

A similar situation arises where a joint venture is staffed by workers on secondment from the construction firms that own the joint venture. Payments by the joint venture to each construction firm for their staff is not payment for construction services and therefore not subject to the reverse charge.

 

Utilities

For the most part, supplies of construction services to utility businesses are likely to be outside the scope of the reverse charge because they are the construction, repair or alteration of the utility companyʼs physical assets. Therefore, although they are CIS registered the end user exclusion will apply.

Exceptions to this will be when a utility company takes on the role of contractor for particular projects such as:

• constructing, repairing or maintaining a private power or gas network for a customer
• installing full heating systems

Where such supplies are made to the utility company, they will be subject to the reverse charge although the utilityʼs onward supply will be to an end user and therefore outside the reverse charge.

Energy Company Obligation funding

Utility companies may meet their Energy Company Obligation funding obligations by:

• only funding the activity
• making a supply to the customer for no payment
• making a supply to the customer for a payment

Only making a supply for payment is a supply for VAT purposes and so may be subject to the reverse charge if specified supplies are being provided and the other conditions are met.

Utility companies are defined as:

• a supplier of gas, electricity, water or telephone services to homes and businesses, or a business (including the corporate group) that supplies such services
• likely to be regulated or working under legislation administered by Ofgem, Ofwat or Ofcom

Local authorities and other public bodies

Public bodies rarely use construction and building services to supply their own construction services and therefore the end user exclusion will usually apply to supplies to them.

Most supplies will be either:

• part of works to the public bodyʼs property and land
• provided to the public body so it can discharge its responsibilities under a special legal regime

It will not matter if such activities are non-business or business (because of a distortion of competition). In both situations the local authority or public body will be an end user.

Situations where the public body will not be receiving supplies as an end user will be where it acts on a commercial basis. The public body will receive a reverse charge supply on any sub-contractor costs it incurs and have to account for it to HMRC. It will also have to establish the end user status of its customer.

Planning gain agreements

Developers may provide many other types of goods and services free, or for a purely nominal charge, to the local authority or other authority under section 106 of the Town and Country Planning Act 1990 or similar agreements.

These agreements are sometimes described as planning gain agreements, find out more information in Notice 742.

Any provision of such goods and services by the developer pursuant to a planning gain agreement is not a supply for consideration and so no VAT is chargeable on that supply. Therefore, the developer is not making onward supplies of construction services under the agreement and so is an end user for reverse charge purposes.