The VAT reverse charge measure for construction businesses – originally due to be introduced from 1 October 2020 – will now come into force on 1 March 2021. 

The key aspects are: 

• It will apply to standard and reduced-rated supplies of building and construction services made to VAT registered businesses, who in turn also make onward supplies of those building and construction services 

• The contractor will be responsible for paying the output VAT due rather than the sub-contractor but can continue to reclaim this amount as input tax 

• The scope of supplies affected is closely aligned to the supplies required to be reported under the Construction Industry Scheme but does not include supplies of staff or workers for use by the customer 

• The legislation introduces the concept of “end users” and “intermediary suppliers”. This covers businesses or groups of associated businesses that do not make supplies of building and construction services to third parties and as such are excluded from the scope of the reverse charge if they receive such supplies. Examples include landlords, tenants and property developers. 

How to prepare

You will need to:

·       make sure your accounting systems and software can deal with the reverse charge

·       consider whether the change will impact your cash flow

·       make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will work

If the VAT reverse charge does not apply to you, you should follow the normal VAT rules. See the enclosed flowchart to help you decide if you need to use the reverse charge.

HMRC understands that companies implementing the domestic reverse charge may initially face some complications. A “light touch” approach will be used in dealing with errors made in the first six months, as long as you are trying to comply with the new legislation.

Penalties will be considered and applied if you are deliberately not accounting for the VAT correctly or are taking advantage of the reverse charge.

When you must use the reverse charge

You must use the reverse charge for the following 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

·       When you must not use the reverse charge

Do not use the charge for the following services, when supplied on their own:

·       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 to use the VAT reverse charge if you supply building and construction services

You must use the reverse charge from 1 March 2021, if you’re VAT registered in the UK, supply building and construction industry services and:

·       your customer is registered for VAT in the UK

·       payment for the supply is reported within the Construction Industry Scheme (CIS)

·       the services you supply are standard or reduced rated

·       you’re not an employment business supplying either staff or workers, or both

·       your customer has not given written confirmation that they are an end user or intermediary supplier

This anti-fraud measure changes the way VAT is collected in the construction industry. It means that the customer receiving the supply of qualifying construction services will have to pay the VAT directly to HMRC, rather than paying it to the supplier.

The reverse charge will not apply to employment businesses supplying construction services. The 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.

See below HMRC guidance on Employment Businesses and is pretty cut and dried on this:

Employment businesses supplying construction workers

Employment businesses are treated differently for the purpose of the reverse charge. Supplies by employment businesses are not subject to the reverse charge, even if those supplies are within the scope of CIS.

Employment businesses supplying construction workers are, for VAT purposes, treated as supplying staff rather than building and construction services.

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

·       contractually employed or otherwise engaged by the employment business

·       a director of the employment business

A similar situation arises with joint ventures, the construction firms that are parties to the joint venture provide workers on secondment to work on the joint venture project. 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.

Labour only sub-contractors

The reverse charge applies to services provided by labour only sub-contractors. The labour only sub-contractor is responsible for the works carried out and therefore subject to the reverse charge. This applies if the services provided are standard rated, or reduced rated, within the scope of CIS.

A supply of labour only construction services is subject to the reverse charge whereas a supply of staff is not. The simplest way to tell the difference for a supply of:

·       labour only construction services – the business supplying the labour will be responsible for overseeing the completion of the work carried out by the workers

·       staff – the customer that receives the workers will be responsible for overseeing the completion of the work carried out

Distinction between employment businesses and labour-only sub-contractors

Supplies by labour only sub-contractors are subject to the reverse charge if the supplies are within the scope of Construction Industry Scheme and all the other conditions are met.

The supplies made by the employment business are not subject to the reverse charge even if those supplies are within the scope of Construction Industry Scheme.

The supplying business should be treated as an employment business if these features apply:

·       the customer contacts the employment business and asks for X workers for Y days

·       the workers are employed by or engaged by the employment business

·       the employment business provides an hourly or daily rate for the workers

·       a timesheet is used to record the hours and days worked

·       the customer sends the signed timesheet agreeing the hours and days worked to the employment business

·       the customer pays the employment business

·       the customer’s site foreman or managers direct and control the works carried out by the workers

·       the customer is responsible for the works carried out

The supplying business should be treated as a labour only sub-contractor if these features apply the:

·       customer contacts a business and asks for a skilled labourer (for example, a bricklayer, electrician or plumber) to carry out specified services

·       labourers are employed by or engaged by the business

·       business provides a price for the works or agrees a measured rate per square metre

·       supplying business is responsible for the labourer’s works

·       supplying business is responsible for correcting any defects following completion of the works

·       customer, or its representatives, agrees that the work has been carried out or certifies payment for the value of works carried out to date

The reverse charge applies to the services supplied by the business (if those services are within the scope of CIS) and VAT should not be charged on the invoices.

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 should 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.

For further information on the scope of the reverse charge and how it will operate, please contact one of our specialists today.