New construction reverse charge for VAT in the UK
From October 1, 2019, the Construction/domestic Reverse Charge will apply in the UK. This means the VAT registered customer receiving the service will have to report the UK VAT due to HMRC instead of paying the UK VAT to the supplier.
The customer can also recover the VAT based on the regular rules. The reverse charge rule applies to individuals or businesses registered for VAT in the UK (it will not apply if the supplies are made to consumers). This rule will affect you if you supply or receive services reported under the Construction Industry Scheme (CIS), so all supplies of building or construction services reportable under the CIS are covered by the new VAT rule.
You will have to apply the reverse charge if you supply any of the following services:
- constructing, altering, repairing, extending, demolishing 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, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
There is however an important difference between CIS and the reverse charge, where materials are included within a service. The VAT reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content. The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.
Supplies to an “end user” (= consumer or final customer) or supplies to an intermediary supplier where there is a connection between the intermediary supplier and the end user or where they both have a relevant interest in the land, buildings or civil engineering works, specified services are also excluded from the new reverse charge rule.
Furthermore, a number of services have been excluded, being:
- 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
If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to the new reverse charge. In addition, if there has already been a reverse charge service between 2 parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as so-called reverse charge services.
If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
What contractors need to do
If you are a contractor you will need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You will need to notify your suppliers if it will or if you are to be considered an end-user. In addition a different tax code has to be set up to ensure proper booking and VAT reporting. If you also act as sub-contractor see next bullet.
What sub-contractors need to do
If you are a sub-contractor you will also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier. In addition you need to set up a new taxcode for proper invoicing, booking and reporting and verify the UK VAT registration numbers belonging to your customers. HMRC suggested wording for the invoice is
- reverse charge: VAT Act 1994 Section 55A applies, or
- reverse charge: S55A VATA 94 applies, or
- reverse charge: Customer to pay the VAT to HMRC.
For more detailed guidance see GOV.UK