Frequently Asked Questions on the VAT Reverse Charge for Construction Services

If you are VAT registered and in the Construction Industry Scheme (CIS), you would be aware that the HMRC has announced a further delay in executing the new VAT reverse charge rules.

The new rules are now scheduled to be introduced on 1 March 2021. It will change the accountability of VAT charges.

The new rules are different, and you may have to alter the way you prepare your VAT returns and present your information on your invoices to your customers Here are some commonly asked questions.

1. What is the VAT reverse charge for construction services?

The VAT reverse charge is a type of accounting for VAT where the supplier of construction services will no longer account for VAT. Instead, the end-customer accounts for VAT. So, according to rules set by HMRC, the customer receiving services will pay VAT to HMRC and not the suppliers

This charge is an extension of the Construction Industry Scheme (CIS) and concerns transactions reported under CIS, which are among VAT-registered sub-contractors and contractors.

2. When is the VAT reverse charge for construction services expected to be introduced?

Although this was initially scheduled for October 2019, it postponed to October 2020 to avoid its cooccurrence with Brexit, helping businesses and allowing them more time to prepare.

However, due to the impact of the COVID-19 pandemic on the construction industry, HMRC planned to extend it by five months further.

3. What if your construction project begins before the reverse charge comes in force but ends after it comes in?

It depends on the tax point. If the tax point is on 1 March 2021 or later, the reverse charges will be applied. If the tax point is before March 2021, current VAT rules will apply.

In the majority of the cases, it will be the date of payment or issue of VAT invoice, whichever occurs first.

In case a prepayment is made, it will be the date when the supplier receives payment. If the invoice was issued 15 days before the work was finished or there was no invoice, it will be the date when the work was finished.

This is the “Time of Supply” rule.

4. What VAT rates does the reverse charge apply to?

VAT reverse charge for construction services is applicable for both reduced-rate and standard VAT supplies. However, it is not applicable for zero-rated supplies.

5. What is the need for a VAT reverse charge for construction services?

HMRC has planned this charge to combat fraud. There were instances when the construction businesses charged VAT for services, but they disappear before paying the VAT bill, taking about 5%-20% additional profit.

By changing the accountability of the VAT charge, HMRC is trying to make this type of fraud impossible.

The introduction of reverse charges is influenced by the success of similar reverse charges schemes such as computer chip and mobile phone retailers and wholesale energy suppliers.