Understanding the domestic VAT reverse charge for construction

Sep 9, 2021 | VAT

If you’re confused about the domestic VAT reverse charge for construction, you’re not alone. Many people have ended up scratching their heads in the past couple of years.

It’s a complicated piece of tax legislation, official explanations of which are often riddled with jargon.

That is unfortunate because if you’re a building contractor or subcontractor, you really do need to understand what it is and how it works. It came into effect from 1 March 2021 and compliance is vital.

In this post, we’ve put it into the plainest English possible, but if you’re still puzzled, or just prefer to talk things through rather than reading, get in touch.

Where did the VAT reverse charge come from?

The construction industry scheme (CIS) was the Government’s approach to cracking down on untaxed cash-in-hand work in the building industry.

The VAT reverse charge is designed to do a similar job in stopping subcontractors charging VAT to customers (‘end users’ in HMRC terminology) but then failing to hand that VAT over to the UK tax authorities.

It was due to kick in from October 2019 but got delayed until March 2020. It was then delayed a second time when the coronavirus pandemic threw everything into chaos.

How does it work in practice?

It applies to VAT-registered subcontractors supplying qualifying construction services. Instead of charging the main contractor VAT, the contractor collects the VAT and pays it to HMRC.

The charge applies only to standard (20%) and reduced-rate (5%) supplies of building services to VAT-registered businesses, which supply those services onward.

Let’s have an example. Say a VAT-registered carpenter does work worth £30,000 fitting out a new block of flats. Under the old system, they’d charge £30k + VAT to the building contractor who commissioned them.

Now, they have to submit an invoice that says the domestic VAT reverse charge applies and charge only the flat fee of £30k. The contractor then has to account for the VAT on their own VAT return and reclaim it from the ‘end user’ (probably a property developer in this case) they’re working for.

Assuming the developer owns the building that’s being worked on, it isn’t ‘supplying services onward’ so the buck stops with the contractor.

Almost any construction services covered by CIS is liable for the reverse charge. If you’re constructing, repairing, altering or demolishing buildings or structures, you’ll be in the frame. Some secondary services also count, like scaffolding and landscaping.

Myths and misconception

The most common misunderstanding is that the reverse charge applies in any way to ‘end users’ – that is, those purchasing construction services from subcontractors. So, if you’re having your kitchen renovated, you don’t have to worry about it.

In fact, if you’re not VAT-registered or registered with the CIS, you won’t ever be in scope of the VAT reverse charge. That means that, as in the example above, most landlords and developers will be exempt.

It really is designed as a ‘business-to-business’ measure, not as something for buyers of services to worry about.

We can work it out

Pinning down who counts as an end user, intermediary, subcontractor or contractor for the purposes of the VAT reverse charge can be tricky.

If you’re in any doubt, or want to be 100% certain, get in touch and we’ll be happy to talk it through.

Ready to go? We’re excited to hear from you.

Let’s get started, as soon as you’re ready. We’re always up for a chat about how we can support you and your business.

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