VAT domestic reverse charge comes into effect

This article was co-authored by Tegan Johnson, Solicitor Apprentice.

Following multiple postponements, the VAT reverse charge for building and construction services has come into effect today, 1 March 2021.

What is the VAT reverse charge?

The reverse charge is a change to how VAT is accounted for in the construction industry. It shifts the responsibility for paying VAT from the supplier of construction services to the customer.

The effect of the reverse charge is that the customer receiving the services pays the VAT to HMRC instead of the supplier. The customer can then recover the VAT subject to the usual HMRC rules.

When does it apply?

The reverse charge applies to “construction operations” as defined by the Construction Industry Scheme (CIS), which covers a wide range of construction services such as construction, alteration or repair of buildings and infrastructure, and trades such as painting and decorating.

There are a number of exclusions, including construction professionals (eg architects and engineers) and end-users (eg occupiers, developers, landlords), provided the end-user has notified their suppliers that they are exempt. HMRC guidance suggests the following notification wording for end-users to issue to their suppliers: “We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.

The reverse charge only applies to standard and reduced-rate VAT services, and not to zero-rated services. It also applies only to VAT-registered businesses who are supplying/receiving services that are reported under the CIS (this will catch the majority of construction contractors and sub-contractors in the UK).

What do I need to do?

The new rules are complex, and will affect different businesses differently. If you have not already done so, you should seek specialist advice from your accountant or tax advisor to ensure you are familiar with the rules and how they impact your business. As a minimum, you will need to ensure that your accounting systems are set up to deal with the new procedures, and all staff responsible for VAT accounting are familiar with the rules.

The government appreciates that implementation of these new systems and processes may cause difficulties, and has promised to apply a light touch approach to errors made within the first six months of the new rules (provided parties are making efforts to comply in good faith).