• Date

    17 Feb 2021
  • Category

    Tax, VAT & Indirect Tax, Employer Solutions

VAT – Changes to Construction Services

The VAT treatment of construction services will change on 1 March 2021. Are you affected? Are you ready?

HMRC believes that around £100m of revenue is lost each year as a result of fraud within the construction sector. To combat this HMRC are introducing a domestic VAT reverse charge procedure to the construction sector. This change takes effect from 1 March 2021.

From 1 March 2021 businesses in the construction industry need to apply a domestic reverse charge on payments that are subject to the Construction Industry Scheme (CIS).

The domestic reverse charge will apply to construction services that are reported under the CIS and goods that are supplied as part of these services. 

It will apply to “mixed invoices” i.e. invoices that cover both supplies that are subject to CIS reporting and supplies that do not. If payments are not subject to CIS reporting, the domestic reverse charge will not apply.

What does this mean in practice?

The change will result in some suppliers of construction services not charging VAT on their sales and their customers having to self-account for VAT on their VAT returns. Customers that have to self-account for VAT will be allowed to record an equal value as input VAT and can recover this according to normal rules. For businesses that cannot recover all of the VAT they incur, this will result in a VAT cost.

HMRC guidance states that businesses supplying construction services must not charge VAT to their customers when:

  1. the customer is registered for VAT in the UK; and

  2. the customer uses the services to make onward supplies of construction services.

The new scheme will not apply where construction services are supplied to final consumers, however the changes will affect supplies between main contractors and sub-contractors.

Services that will be subject to Domestic 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 that are not subject to Domestic Reverse Charge

  • Drilling for, or extracting, oil or natural gas.
  • Extracting minerals 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.



 

The changes do NOT apply to “end users” or “intermediary suppliers” provided certain conditions are met.

An end user only receives and does not supply construction services to others. They are a business, or a group of businesses, that does not make onward supplies of the construction services and is registered for CIS as mainstream or deemed contractor because it carries out construction operations, or because the value of its purchases of building and construction services exceeds the threshold for CIS.

Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to “end users”, i.e. they either:

  • share a relevant interest in the same land where the construction works are taking place; or
  • are part of the same corporate group or undertaking.

From 1 March 2021 intermediary suppliers and end users need to confirm their status to their suppliers in writing to ensure the reverse charge does not apply.  HMRC has provides suggested wording and clarified that intermediary suppliers can call themselves “end users” for this purpose.  Should the end user fail to do this, the reverse charge will apply, and the end user will be responsible for accounting for VAT.

Invoices and VAT returns

For the domestic reverse charge, the supplier’s invoice must show all information normally required on a VAT invoice.  While the VAT amount due should be clearly stated it must not be shown as VAT charged.  The invoice must also include a reference to the domestic reverse charge.

The supplier only completes Box 6 on its VAT return, i.e. it only declares the net value of the sale.

The customer completes Box 1 (the VAT amount), Box 4 (the input tax amount) and Box 7 (the net value of the sale).

Business involved in the construction industry should familiarise themselves with the new rules. They should:

  • review their supply chain and identify intermediary suppliers and end users;
  • notify their suppliers of their own end user status, if applicable;
  • check the VAT and CIS registration status of their customers;
  • review the invoicing and reporting requirements;
  • update their systems, processes and terms & conditions; and
  • review the cash flow implications including considering submitting monthly returns to speed up any VAT repayments if applicable.

HMRC’s guidance provides examples of typical scenarios, the application of the domestic reverse charge in certain sectors, transactions and gives situations where HMRC will accept simplifications.

In practice if you are involved in a supply chain that will be caught by the new rules (either as a sub-contractor or main contractor), you need to confirm the following points.

  • Cash flow - If you are a sub-contractor, from 1 March you won’t charge output VAT on supplies that are caught by the change. From this date you will not receive output tax payments and will not have the short-term cash-flow benefit of this income. You should therefore review the frequency of your VAT returns and confirm how your cash flow position will be affected by the change.
  • Paperwork - We would suggest that main contractors obtain and retain a declaration from their end users to support the application of VAT on their supplies. Subcontractors may also want to clarify their position with main contractors to ensure there is no misunderstanding or VAT errors.
  • Accounting treatment & VAT procedures - You will need to change the way that you account for VAT and record income in your accounts. This needs to be understood and all procedural changes made before 1 March.

We are here to help

In a recent poll, we found over 50% of individuals felt they weren't ready for 1 March 2021 and that they would need to do more regarding VAT in order to be ready for these imminent changes.

At Azets, we are here to provide help wherever it is needed. If you require further advice or guidance regarding the new domestic reverse charge rules, please get in touch with your usual Azets contact or contact a member of our VAT & Indirect Tax team.

To view HMRC’s full guidance, visit: https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services  

Watch our webinar

On 9 February 2021 our expert advisors hosted a webinar, setting out how these new rules will work and the interaction the rules will have with the Construction Industry Scheme. Scott CraigVeronica Donnelly,  and David Hedges explained the practical implications of the imminent Domestic Reverse Charge changes, how they could impact your business and what you should be doing to prepare. 

To watch our webinar recording and download a copy of our slides, click here

Contact one of our VAT Domestic Reverse Charge specialist advisors

Scott Craig

Partner, National Head of VAT & Indirect Taxes

E
scott.craig@azets.co.uk


Veronica Donnelly

VAT Partner

E
veronica.donnelly@azets.co.uk


Contact our CIS expert advisor

Dave Hedges

Partner, Head of Employment Tax

E
david.hedges@azets.co.uk


About the author

Scott Craig Photo

Scott Craig

Partner and Head of VAT Edinburgh
View all news & insights

You might also be interested in