New VAT rules for construction services will come into effect on 1 March 2021 in a major change to the way VAT will be collected in the construction sector.

The new domestic reverse charge regime of VAT accounting must be used for most supplies of building and construction services. It applies to standard and reduced-rate VAT services for individuals and businesses registered for VAT in the UK, as well as those reported within the Construction Industry Scheme (CIS).

Background

The reverse charge scheme – already delayed twice to provide businesses with more time to prepare – is intended to prevent the avoidance of VAT by suppliers who charge and collect VAT from the recipient of a supply, but then fail to account for that VAT to HMRC.

Under the new regime, the responsibility for accounting to HMRC for VAT moves from the supplier to the recipient.

What businesses are impacted?

Normal VAT invoices will continue to be issued to domestic customers and other “end users” as defined.

However, the new rules affect suppliers of standard or reduced rated building services between VAT–registered businesses in the supply chain, who will not be invoiced in the usual way. The sub-contractor will not charge VAT on their invoice to the contractor for whom they are working and will not account for output VAT, although they must identify the rate and amount of VAT due and notify their customer that the VAT must be accounted for by them on their VAT Return. The sub-contractor will only be paid the net value of the work done without VAT.

The contractor receiving supplies from the sub-contractor will be obliged to enter the VAT identified on their sub-contract invoice in their VAT return as well as claiming this back.

Typically the reverse charge will apply to sub-contractors supplying their services to other contractors in the construction sector on a supply and fit or labour only basis – but not labour agencies. It applies if the services provided are:

• standard rates or reduced rated, and
• within the scope of CIS

Suppliers

In the case of suppliers you must use the reverse charge from the 1 March 2021 if you are VAT registered in the UK, supply building and construction industry services and: –

• your customer is registered for VAT in the UK;
• payment for suppliers reported within the Construction Industry Scheme;
• the services you supply are standard or reduced rated;
• you are not an employment business supplying either staff or workers, or both; and,
• your customer has not given written confirmation that they are end user or intermediary supplier.

Checks will need to be carried out to ensure your customer’s VAT position and CIS registration.

Customers

Customers must account for the Reverse Charge if they are VAT registered in the UK, receive supplies of building and construction industry services and:

• your supplier is registered for VAT in the UK;
• payment for supply is reported within the Construction Industry Scheme;
• the services received are standard or reduced rates;
• the supplier is not an employment business supplying either staff or workers; and,
• you are not an end user or intermediary supplier who has notified suppliers of that fact.

Businesses that are both suppliers and customers (i.e. mid- tier businesses within the construction chain) will have to take the relevant steps to ensure compliance with the new rules.

Comment

With little time to prepare for the changes coming in, it’s little wonder that some construction businesses are already feeling overwhelmed by the reverse charge scheme. Ensuring that accounting systems and software are robust enough to deal with the new regime, and consideration as to whether the change will impact upon cash flow, are just two areas for consideration.

For help and advice on the VAT reverse charge scheme, please contact Martin Collingwood, head of construction at Andrew Jackson Solicitors, on 01482 325242 or email martin.collingwood@andrewjackson.co.uk