When You Must Use the VAT Reverse Charge for Building and Construction Services

The Domestic VAT reverse charge, or the reverse charge, will be applicable in the UK from 1^st March 2021. If you are associated with building and construction services and do not know what this means for you, read on.

What is the VAT Reverse Charge?

Before you know when you can use this charge, let’s understand a tad bit about it.

The reverse charge is introduced to avoid VAT fraud in the building and construction sector. It was seen that suppliers in this sector collected VAT from the recipient but did not pay it to HMRC.

According to the reverse charge, the recipient will now directly pay the charges to HMRC.

When You Must Use the VAT Reverse Charge?

The reversal charge is applicable in the following cases:

• Your customer is a taxable person when the supply is made
• You are a taxable person supplying the inclusive construction services (more on this below)
• Customer and supplier are registered for the Construction Industry Scheme (CIS)
• The supplies are taxable at reduced or standard rates
• The supply of VAT includes construction materials and services
• The customer and supplier are not connected
• The customer aims at an ongoing supply of construction to another party

What Specified Services Are Included?

Specified services include:

• Constructing, repairing, demolishing, altering, extending, or dismantling structures or buildings, along with offshore installation services.
• Constructing, repairing, demolishing, altering, extending any works planned to form, works forming, part of land including roadworks, walls, electronic communications equipment, power lines, inland waterways, aircraft runways, railways, harbours, and docks.
• Reservoirs, wells, pipelines, water mains, industrial plants, and installations for coast protection, land drainage, or defence.
• Installing heating, air-conditioning, power-supply, sanitation, lighting, ventilation, drainage, fire protection, or water supply systems in any structure or buildings.
• Internal cleaning of structures and buildings, as long as they are carried out during alteration, construction, extension, repair, or restoration.
• Decorating or painting the inside of the external structures of any structure or building.
• Services that are an essential part of, or a part of completion or preparation of the services mentioned above, including earth-moving, tunnelling, and boring, erection of scaffolding, the provision and landscaping of roadways and other access works, site clearance, excavation, laying of the foundation, and site restoration.

How Does this Work?

If you offer a service that meets the mentioned criteria, you cannot charge VAT to the customers. You will also need to confirm that they are CIS and VAT registered and not the end-user.

If you are using software to calculate VAT and generate invoices, you will have to change the tax codes. Invoices should include wordings that imply that the reverse charges to be borne by the customer. It should also state the rate of VAT or how much VAT is due. This VAT amount shouldn’t be included in the amount charged to the customer.

This means if you are the recipient and not the end-user, and you are CIS and VAT registered, your supplier will not charge VAT. You will need to charge yourself and pay it to HMRC.