As providers of business management software to manufacturing and construction businesses, Clarity are always looking for new ways we can help support our customers. We may not be experts in accountancy and bookkeeping, but we always stay informed of changes that could impact our customers; we’re here to support your business.
Our article outlines what the VAT Domestic Reverse Charge is using sources from the UK Government. We’ve linked useful sources throughout so you can find out more about the charge and what you need to do.
VAT reverse charge for construction and building services
VAT registered construction businesses should note that this reverse charge measure is
coming into effect on 1 March 2021. A Revenue and Customs Brief was issued in June 2020, giving more information.
Every VAT registered construction business will have received an individual letter in
January (further to letters sent in February and September 2020), advising them to check if
they might be liable for the reverse charge. If they are liable, they should start to prepare
Find out more information on the scope of the reverse charge and how it will operate.
The key aspects are:
It will apply to standard and reduced-rate supplies of building and construction services made to VAT registered businesses, who in turn also make onward supplies of those building and construction services.
The contractor will be responsible for paying the output VAT due rather than the sub-contractor, and can continue to reclaim this amount as input tax.
The scope of supplies affected is closely aligned to the supplies required to be reported under the Construction Industry Scheme, but does not include supplies of staff or workers for use by the customer.
The legislation introduces the concept of ‘end users’ and ‘intermediary suppliers’ – this covers businesses or groups of associated businesses that do not make supplies of building and construction services to third parties and as such are excluded from the scope of the reverse charge if they receive such supplies. Examples include landlords, tenants and property developers.
When you must use the reverse charge
You must use the reverse charge for 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.
When you must not use the reverse charge
Do not use the charge for the following services, when supplied on their own:
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.
When supplying a service subject to the domestic reverse charge, suppliers must:
Show all the information required on a VAT invoice.
Make a note on the invoice to make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT.
Clearly state how much VAT is due under the reverse charge, or the rate of VAT if the VAT amount cannot be shown, but the VAT should not be included in the amount charged to the customer.
The VAT regulations (1995) say invoices for services subject to the reverse charge must
include the reference ‘reverse charge’. Here are some examples of wording that meet the
Reverse charge: VAT Act 1994 Section 55A applies
Reverse charge: S55A VATA 94 applies
Reverse charge: Customer to pay the VAT to HMRC
If your accounting software cannot show the reverse charge
If your software cannot show the amount of VAT to account for under reverse charge, you
State that the VAT is to be accounted by the customer.
Add wording to the invoice to say ‘customer to account to HMRC’ for the reverse charge.
Make sure customers can identify reverse charge goods or services.
To find out how Clarity Software is planning to account for these changes in our software packages, please get in touch. We are happy to work out a solution that suits you and your business.
Please visit the gov.uk website for more detailed information on how the VAT charge affects you and always refer to a trusted legal financial advisor.