VAT Reverse Charge for Construction Work

Domestic reverse charge is a mechanism designed to prevent trader fraud because it holds the customer accountable for VAT and thus eliminates the opportunity for the supplier to go missing without declaring and paying the VAT to the HMRC.

In layman's terms, domestic reverse charge is the process by which VAT is charged by the customer rather than the supplier. Domestic reverse charge is only applicable to the supply of certain or specified construction services to other construction-related businesses.

Construction VAT Reverse Charge

When is it necessary to use reverse charge?

The reverse charge on construction services affects which VAT rates?

The reverse charge is applied to construction services that are subject to both standard and reduced VAT rates.

The VAT reverse charge will not apply to zero-rated services such as new home construction.

What services are exempt from the VAT reverse charge for construction?

Construction services that are not subject to reverse charge, such as:

Invoices for domestic reverse charge

Domestic reverse charge service invoices must include all of the information required for a standard VAT invoice. In the event that the VAT amount cannot be displayed, this includes the amount of VAT due under the reverse charge or the VAT rate. They must, however, make it clear that the reverse charge is in effect and that the consumer is responsible for VAT.

The effect on construction companies

It is recommended that construction companies ensure their accounting systems can handle reverse charge supplies and conduct ongoing audits to ensure supplies and purchases are handled correctly. Due to the requirement to specify the VAT amount on domestic reverse charge invoices, there is a risk that suppliers will report incorrect VAT to HMRC, and customers will recover the same.

Subcontractors who used VAT collected from their customers as working capital until required to submit it to HMRC are likely to experience cash flow issues. These companies, as well as their customers, should consider whether payment terms should be revised to avoid supply chain issues.

What steps should construction companies take?

Construction companies should do the following:

1. Conduct an audit of supplies made to and received from other VAT-registered contractors to determine which are subject to a reverse charge beginning March 1, 2021.
2. Consider the cash flow impact after March 1, 2021, as well as any other available mitigation measures.
3. Obtain confirmation from customers that they are end users, as well as their VAT registration and CIS status. Clients who do not provide information indicating that they are end users must be treated as such.
4. If you are no longer a net VAT payer, consider whether it is necessary to switch to monthly VAT returns.
5. Assess the flat rate scheme's suitability for your company.
6. If supplies are covered by the DRC, discontinue the cash accounting scheme.
7. Consider whether it is appropriate for you to make arrangements for suppliers to purchase goods and materials that fall under the DRC in order to avoid having to fund VAT payments for goods and materials.

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