UK VAT reverse charge for building and construction services
- December 2020
- 5 minutes
- brexit
- Business Support
- CIS
- construction
- Contractors
- coronavirus
- grant funding
- seiss
- Subcontractors
- ukeconomy
- VAT
Explore the upcoming VAT ‘reverse charge’ for building and construction services in the UK, aimed at combating fraud in the sector. This comprehensive guide outlines the significant impact on VAT compliance and cash flow, with the implementation date delayed to 1 March 2021 due to the challenges posed by the coronavirus pandemic.
Scope of Reverse Charge:
The reverse charge shifts the responsibility of paying VAT directly to HM Revenue & Customs (HMRC) from the supplier to the customer in the construction industry.
Exemptions apply for supplies to end users, connected parties, and landlords and tenants, provided the customer notifies the supplier of the exemption.
Impact on Businesses:
Businesses in the construction sector must adapt processes and systems to comply with the reverse charge, requiring significant changes.
Originally slated for October 2019, the introduction was postponed twice due to concerns about industry readiness and the pandemic’s impact.
VAT Fraud Concerns:
The measure addresses the increase in VAT fraud within labor supply chains in large construction projects, estimated to cost the UK Exchequer over £100 million annually.
Domestic Reverse Charge:
Already implemented for certain services and goods, the domestic reverse charge prevents suppliers from absconding with the VAT element, shifting liability to customers.
Applicable to supplies at standard or reduced rates reported through the Construction Industry Scheme (CIS).
CIS Obligations:
The Construction Industry Scheme (CIS) deductions apply to payments made by contractors to subcontractors for construction work, with some non-construction businesses treated as ‘deemed contractors.’
Excluded Services and Exemptions:
The reverse charge covers a wide range of construction operations but excludes specified services like those provided by architects and surveyors.
Exemptions apply for end users, group companies, and landlord-tenant transactions if the customer notifies the supplier.
VAT Return and Compliance:
Businesses receiving construction services must account for reverse charge VAT on their VAT return and recover it, subject to standard VAT recovery rules.
The reverse charge applies throughout the supply chain until the customer is no longer a business making construction service supplies.
Implementation Challenges:
The delayed implementation allows businesses to prepare for the reverse charge, minimising disruptions and addressing potential cash flow difficulties.
Conclusion:
Stay informed about the UK VAT reverse charge for building and construction services, ensuring compliance, and navigating potential challenges. Businesses are encouraged to adapt systems and processes to meet the new rules effective from 1 March 2021.