The domestic VAT reverse charge for building and construction services finally comes into effect on 1 March 2021. The start date was originally 1 October 2019, but it was postponed by one year until 1 October 2020 to allow those affected more time to prepare. The start date was further delayed – until 1 March 2021 — as a result of the COVID-19 pandemic.
Detailed guidance on the charge can be found on the Gov.uk website.
Nature of the charge
Under the domestic VAT reverse charge, the customer receiving the service must pay the associated VAT to HMRC rather than paying it to the supplier. The charge will be relevant to you if you are an individual or a business that is registered for VAT in the UK, and you supply or receive specified services that are reported under the Construction Industry Scheme (CIS). If you are a customer, you will pay the supplier the amount net of VAT and pay the VAT to HMRC. If you are a supplier, you will receive payment net of VAT and will no longer need to pay the VAT to HMRC.
Services within the scope of the charge
The following services fall within the scope of the charge:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services;
- constructing, altering, repairing, extending or demolishing any works forming, or planned to form, part of the land, including 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 the purpose of land draining, coast protection or defence;
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building;
- internal clearing of buildings and structures which is carried out in the course of their construction, alteration, repair, extension or restoration; and
- services that 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.
The domestic VAT reverse charge does not apply to:
- drilling for, or extracting, oil or natural gas;
- extracting minerals (using underground or service working), and tunnelling, boring or the construction of underground works for this purposes;
- 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, and delivering any of these to site;
- the professional work of architects or surveyors, or of building engineering, interior or exterior decoration or landscaping consultants;
- making, installing and repairing art works, such as sculptures and other items that are purely artistic, signwriting, and erecting, installing and repairing signboards and advertisements;
- installing seating, blinds and shutters; and
- installing security systems, including burglar alarms, closed circuit television and public address systems.
Preparing for the charge
If you are an individual or business that falls within the scope of the charge, you will need to ensure that you are ready to apply it from 1 March 2021. In preparation, you will need to check that your accounting systems and software can cope with the reverse VAT charge, and upgrade them if necessary. You should also ensure that any staff who deal with VAT understand the changes and what they need to do to comply.
It is also prudent to assess how the charge will impact on your cash flow, particular if you supply services that fall within the scope of the charge as you will no longer receive the associated VAT.
Completing the VAT return
If you are a supplier, you must not enter any output tax on any sales that fall within the domestic VAT reverse charge on building and construction services on your VAT return. Instead, you only need to enter the net sales value.
If you are a customer purchasing services within the scope of the charge, you must account for the associated VAT to HMRC by including it as output tax on your VAT return. You should not enter the net value of the purchase as a net sale. You can reclaim the input tax on your reverse charge purchases in accordance with normal VAT rules.
We can help
We can help you to prepare for the introduction of the charge, and comply with your obligations in relation to it.