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VAT domestic reverse charge: your questions answered
Having been delayed to March 2021 as a result of the pandemic, the introduction of the VAT domestic reverse charge change for construction is now upon us. In this article, Nottingham chartered accountants Clayton & Brewill provides answers to the most frequently asked questions around the reverse change and highlights how you can prepare your business for the change.
What is the VAT domestic reverse charge?
The VAT domestic reverse charge for construction is a change in how VAT is handled for certain kinds of construction services in the UK. It means that a person supplying certain construction industry services to a VAT-registered customer will no longer be required to account for VAT. Instead, the customer will be liable to HMRC for the VAT in respect of those purchases – the ‘reverse charge.’
From 1 March 2021, it must be used for most supplies of building and construction services. The charge is effectively an extension of the Construction Industry Scheme (CIS) and applies only to transactions that are reported under the CIS and are between VAT-registered contractors and sub-contractors.
The charge applies to both standard and reduced-rate VAT supplies. It doesn’t apply to zero-rated supplies.
Why is the change being introduced?
Following the success of similar reverse charge schemes for telecommunication services, mobile phones and computer chips, HMRC has stated that the aim of the change is to tackle fraud within the construction sector by moving the VAT charge down the supply chain.
The construction industry is frequently targeted by fraudulent businesses that charge VAT for the services they supply, but then disappear without paying their VAT bill – essentially taking with them a 5% or 20% additional profit that doesn’t belong to them (and very likely having provided the work at an uncompetitive discount because of this). This is known as missing trader fraud. It is hoped that the VAT domestic reverse charge will prevent this from happening.
Who does it apply to?
The construction services covered by the reverse charge are those falling within the definition of ‘construction operations’ in CIS. This broad definition includes the construction, alteration, repair, extension, demolition or dismantling of buildings or structures and infrastructure such as roads, railways and waterways. It also includes painting and decorating. Specified services are excluded, including professional services of architects, surveyors and certain consultants.
An extensive list of areas where you must/must not use the reverse charge can be found on the government website. If you’re still feeling unsure about whether or not you should use the charge, please get in touch with the Clayton & Brewill team. We’d be happy to provide further guidance.
Why was the introduction of the charge delayed?
The changes were set to be introduced in October last year; but with many construction projects halting because of the pandemic, it would have come at too difficult a time. The government therefore took the decision to announce that it would delay the measure to March 2021.
The announcement also introduced the requirement for end-users to issue a written confirmation to their suppliers to confirm their status.
How you can prepare for the domestic reverse charge
There are a number of recommended ways in which you can prepare for the reverse charge:
- check whether the reverse charge affects either your sales, purchases or both
- make sure your accounting systems and software are updated to deal with the reverse charge
- consider whether the change will have an impact on your cashflow
- make sure all staff responsible for VAT accounting are familiar with the reverse charge and how it will operate