Domestic Reverse Charge: what this means for your business
There have been some pretty big changes for the construction industry recently where VAT is concerned. On 1 March 2021, the UK government rolled out the domestic reverse charge; aimed at tackling fraud totalling millions of pounds per year.
What is the Domestic Reverse VAT Charge?
UK suppliers have been accounting for their own VAT for several decades. Many SMEs use VAT payments from customers as a source of working capital before sending the funds to HMRC.
However, that’s changed. VAT cash no longer flows between VAT registered businesses involved in the construction industry.
The fraud is caused when suppliers or ‘subcontractors’ charge main contractors VAT but ‘disappear’ before passing sums on to HMRC.
The Construction Industry Scheme (CIS) outlines special tax rules for buyers and suppliers operating in the construction industry. This tax deduction scheme covers any ‘construction operations’ undertaken by any entity in the UK.
Under CIS, contractors take deductions from subcontractors’ payments and pass these on to HMRC as advances towards subcontractors’ tax and National Insurance.
When you must use the VAT reverse charge
According to the HMRC the following list of construction services are included – but you should remember that the reverse VAT charge applies both to these services as well as any construction materials used directly while providing them.
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
What does this mean for my business?
If your building and construction business is part of the CIS then the way you handle and pay VAT is likely to change.
To put it simply; subcontractors were able to add on the VAT element of 20% on to the invoices – so payment was received for full value and then amended at VAT return (Quarterly).
Now this is no longer the case and only main contractors can add on VAT. For a sub-contractor, only the value of the invoice can be paid. So, essentially businesses have lost 20% of their working capital.
If you are a sub-contractor you should also be aware that your customers will no longer be paying you VAT, which will reduce the gross value of payments coming into your business. So you’ll need to consider and plan for the impact of this on your day-to-day cashflow.
We are here to help
Lack of knowledge and guidance in dealing with VAT Reverse Charge could lead to financial trouble. Taking help from an expert professional can help you get through the process. We have a team of experts within this sector and can assist in reviewing cashflow and providing advice of funding facilities to continue to enable growth or manage cashflow.