VAT Reverse Charge in Construction Industries
If you are in the building and construction industry, you may have heard about the VAT reverse charge legislation being implemented from March 1st, 2021, since October 2019.
This charge has been brought in as an anti-fraud measure to mitigate the corporate crime of companies receiving VAT from their customers, and never paying it to HMRC. With VAT being a form of indirect corporation tax, the onus is on business owners to collect the levy from consumers and pay it to the government on their behalf.
It will affect any construction business that is VAT registered, and who report their services under the Construction Industry Scheme (also known as CIS). In short, what it now means, is that the contractor will be liable for the VAT paid to HMRC, rather than the subcontractor.
What is it?
If you pay for the services of subcontracting tradesperson, you will now have to add the VAT amount, that you would have paid directly to the tradesperson, to the total VAT amount that you owe HMRC at that quarter.
This means that if you run a tree surgeon business, and you hired a tree surgeon to carry out some work that was VAT registered, you would add the 20% VAT to your total VAT returns, instead of paying it to the subcontractor as part of their fee. This is a measure designed to prevent tax fraud.
As usual, HMRC’s legal team leaves no room for “innocent mistakes” and will deploy hefty penalties upon anyone found not to be following the law. It is important, therefore, that you and all of your subcontractors are well-prepared for this change.
To avoid fines and penalties ensure you:
- Have made necessary adjustments to your accounting systems and software. We will be updating all of our systems accordingly, for those to whom the reverse charges apply.
- Consider how or if the change will affect your cash flow and build a safety net accordingly.
- Brief your accounts and VAT team on the changes and what they mean.
This handy flowchart on the HMRC website will help you to decide whether the reverse charge actually applies to you.
When to use it
There is a comprehensive list on HMRC’s website of situations in which the reverse charge applies. It is as follows:
- Constructing, altering, repairing, extending, demolition 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, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
When not to use it
There are also situations where the reverse charge is inappropriate and must not be applied.
- Drilling for, or extracting, oil or natural gas
- Extracting minerals (using underground or surface working) and tunneling, 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 artworks 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
Aston Black is always well-prepared and clued to the changes in HMRC legislation. We will help you avoid making costly mistakes and allow you to focus on running your business as well as you can, taking the headache out of taxes. Moreover, we even support you with mediation with HMRC.
To become one of our happy clients and to have your needs assessed, get in touch for a free thirty-minute consultation.