VAT alert - Domestic reverse charge article updates

22.02.2021
Callum McCormack
VAT

From 1 March 2021, if your VAT-registered business provides certain supplies of construction services to another business you may no longer need to charge them VAT. This is because your customer may need to account for it under the new domestic reverse charge for construction services.

This reverse charge will affect the supply of building and construction services where they are supplied at the standard or reduced VAT rates and are also to be reported under Construction Industry Scheme (CIS) rules. Supplies between sub-contractors and contractors (as defined by CIS) will be subject to the reverse charge, unless the recipient is an end-user.

An ‘end-user’ is defined as a recipient who will use the services for themselves rather than selling them on (such as a company owning a property). This distinction is important because supplies made to end-users will continue to be subject to a normal VAT rules. As a supplier of construction services, checks to contracts should be made to determine who the work is being carried out for.

What if I am a contractor?
As a contractor you will need to review all of your contracts with sub-contractors to decide if the reverse charge will apply. You should notify your suppliers accordingly to confirm what VAT treatment should be used.

What if I am a sub-contractor?

You may wish to contact your customers to get confirmation from them if the reverse charge will apply. You may also want to confirm if the customer is an end-user, although HMRC have clarified that it is the responsibility of the customer to formally confirm their status to you.

If the domestic reverse charge applies then you must:

  • Continue to show all the information normally required to be shown on a VAT invoice
  • Annotate the invoice to make clear that the domestic reverse charge applies and that the customer is required to account for output VAT to HMRC

The following table gives a limited summary of where the reverse charge does and does not apply:  

Subject to reverse chargeSubject to reverse charge
Constructing, altering, repairing, extending, demolishing, or dismantling buildings or structures (whether permanent or not), including offshore installation servicesDrilling for, or extracting, oil or natural gas
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 harboursExtracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
Pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence Manufacturing building or engineering components or equipment, materials, plant, or machinery, or delivering any of these to siteManufacturing building or engineering components or equipment, materials, plant, or machinery, or delivering any of these to site
Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structureManufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension, or restorationThe professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
Painting or decorating the inside or the external surfaces of any building or structureMaking, installing, and repairing art works such as sculptures, murals and other items that are purely artistic
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 worksSignwriting 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

End-users and intermediary suppliers
The reverse charge does not apply to intermediary suppliers – for example, if a number of connected businesses collaborate to purchase construction services, they would all be treated as if they are the end-users. Intermediary suppliers are VAT and CIS registered businesses connected to end-users who:

  • share a relevant interest in the same land where the construction works are taking place; and
  • belong to the same corporate group or undertaking

HMRC have clarified that it is the responsibility of the end-user to confirm their status to their suppliers, which should take the form of a written document the supplier can keep a record of. In the absence of proper confirmation of end-user status, suppliers should assume the reverse charge applies where the other conditions are met.  

HMRC acknowledges that some businesses which have large numbers of active contracts with sub-contractors at a variety of sites and may have difficulty establishing whether the reverse charge applies or not in the run-up to 1 March 2021. The guidance therefore states that where contractors can see that the reverse charge applies to more than 5% (by volume or value) of all contracts with a particular sub-contractor, they may apply the reverse charge to all contracts with that sub-contractor.

Transitional arrangements mean that normal VAT rules will apply to invoices for supplies entered into customers’ accounting systems before 1 March 2021, if payment is made on or before 31 May 2021. The reverse charge will apply in all cases where invoices are entered into systems on or after 1 March 2021, or payment is made on or after 1 June 2021.

Further information and a flowchart can be found on HMRC’s website.

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