Domestic Reverse Charge in Construction Industry

HM Revenues and Customs has recently introduced Domestic Reverse Charge for VAT on construction industry. In this article our industry experts explains this new rule.

According to the new VAT rules, subcontractors who are VAT registered will not charge VAT to VAT-registered businesses on certain construction services. Now in the new rules, the VAT registered business or customer will “self-account” for VAT due. The term “self-account” for the VAT due is called Reverse charge.

The objective of the Domestic Reverse Charge is to counter “missing trade fraud”. A fraudulent activity where construction companies are formed to provide services and charge VAT on sales, and when it comes to output VAT payment they just shut down their operations and disappear without paying any VAT that they collected from its customers.

The induction of Domestic Reverse Charge means VAT is not paid until it reaches the end user or the private customer, which means practically halting VAT flow around the supply chain.

Who will be affected by this new VAT RULE?

• It applies to CIS (Construction Industry Scheme)
• The Reverse Charge may apply to any VAT registered construction company who supplies services to another VAT- registered contrition company.
• It will only applied to standard and reduced rated services whereas there will be no change for Zero-rated services.
• The services that were require to be reported through Construction Industry Scheme may be subject to New VAT rules.

When you must use the reverse charge

• Alternation, repair, extension, construction, dismantling, demolition, and offshore instalments.
• Extension, alteration, repair, demolition, or construction of works forming, or to form, part of the land including road walks, electronic communication apparatus, power lines, walls, inland waterways, docks & harbours, sewers , aircraft runways, reservoirs , wells, water-mains, installations with the purpose of land drainage, defence, or cost protection, industrial plants.
• Installation in any structure or building, heating, lighting, ventilation, power supply, drainage, fire protection and air conditioning.
• Internal cleaning of structures and buildings performed during the extension, repair, construction, restoration or alteration.
• 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

More information available on VAT Reverse technical guide. (https://www.gov.uk/guidance/vat-reverse-charge-technical-guide#flowcharts)

How CAC Training (cactraining.co.uk) can help? We provide professional training on CIS and we also provide accountancy services to help your business to file timely and accurate VAT to HMRC.