Reverse Charge - Construction Services
From 1 March 2021 (originally 1 October 2019), many businesses within the constrtuction sector will be required to bring VAT to account through the reverse charge procedure.
Under the reverse charge, the customer and not the supplier is responsible for VAT declarations on supplies received. In practice, the customer declares both the seller's output tax and their own input tax simultaneously on the same VAT return.
The measure is aimed at reducing the incidence of subcontractors charging & collecting VAT which they then fail to declare to HMRC.
Whilst it might be an effecrtive anti-avoidance strategy it will be something of an administrative headache for many businesses.
Which suppliers are affected?
All trades serving the construction sector are potentially caught by the new rules. A building contractor receiving services from, say, electricians or carpenters will be responsible for accouting for VAT on services received under the reverse charge. Similarly the subcontractors supplying such services will have to ensure that they follow the correct rules when invoicing the main contractor.
Click here to download HMRC's flowchart to see if you are affected.
A number of sectors will not be affected by the new rules. Principally mining industries, manufacturers which supply into the construction industry. A more comprehensive list may be found here.
Final consumers will not be affected by the reverse charge. This might be a home owner or equally a business refurbishing its own office.
As part of the changes suppliers will be expected to verify both the CIS & VAT registered status of thier clients before applying the reverse charge procedure.
Once a business has established that the reverse charge applies to a transaction, they must ensure that they include a statement on their invoice notifying the customer of their obligation to apply the reverse charge. Something along the following lines will suffice - Reverse charge: Customer to pay the VAT to HMRC.
They must also ensure that they show the amount of VAT due from the customer under the reverse charge. The VAT due figure should be not form part of the invoice total.
The procedure applies equally to self-billing arrangements.
Sellers are only required to enter the value of their reverse charge supplies in box 6 of their VAT return.
Customers are required to enter the net purchase value in Box 7 of their VAT return and the VAT due in Box 1 and deductible input tax in Box 4. In most circumstances the tax due will be recoverable as input tax.
As ever if you need guidance speak to one of our VAT advisers.