Construction sector VAT – Domestic Reverse Charge Recap

Construction sector VAT – Domestic Reverse Charge Recap

After several delays, the Domestic Reverse Charge for construction services (the DRC) will finally come into force on 1 March 2021.

We have been talking to clients about preparing for the DRC for some time, so we are not anticipating any surprises. However, here is a re-cap of the DRC for construction businesses which you should read to ensure you are prepared.

Background to the DRC

The aim of the DRC is to combat missing trader fraud in the construction sector.

It will result in a significant shift in the way VAT is brought to account in construction industry supply chains. In many cases it will result in the customer, rather than the supplier, being required to account for the VAT due on supplies they receive.

It introduces some new and unfamiliar concepts that will require significant changes in VAT accounting controls and procedures.

Which services will it apply to?

The DRC will apply to supplies of ‘specified services’ between VAT registered businesses where the recipient makes an onward supply of those specified services. Specified services are generally services that are defined as construction operations for the purpose of the Construction Industry Scheme (CIS).

The DRC will apply to a broad section of businesses involved in property development, even those who may not typically consider themselves to be construction companies. Among those included are construction, alteration, repair, extension, painting and decorating, plus the demolition of buildings, civil engineering and the installation of heating, lighting and air-conditioning.

Some services will not fall within the scope of the DRC however, where there is a reverse charge element in a supply then the whole supply may be subject to the DRC.

The DRC will apply to specified services unless:

• The services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building
• The recipient makes onward supplies of those construction services to a connected company
• The recipient is not VAT registered, or required to be VAT registered
• The recipient is not registered for the CIS
• The supplier and recipient are landlord and tenant or vice versa, or
• The supplies are zero-rated.

Where specified services have been provided, subsequent services on the same site made by the same supplier, may also be covered by the DRC, provided both parties agree. However, where the original services did not come within the scope of the DRC, but subsequent services do, then the VAT treatment will change.

Businesses will therefore need to monitor the VAT position throughout the term of each contract.

Who is an end user?

An end user is a person who receives the specified services for any purpose other than making an onward supply of those services. The customer must state if it is an end user. Where the customer has not provided this confirmation either in writing, an email, or in the contract, HMRC’s guidance is that the supply will come within the scope of the DRC and no VAT is charged.

On occasions it will be clear to the contractor that its customer is an end user and should be charged VAT but the customer has not given confirmation.  In these cases HMRC’s guidance says that it will be acceptable to charge VAT in the normal way. In addition to confirming if your customer is an end user you should also require them to confirm their VAT and CIS status and provide their VAT number. We would recommend that this is confirmed in the contract before any invoices are raised.

What about building materials?

Where goods and building materials are provided together with construction services in the course of the construction work then the DRC also applies to these goods. There are likely to be cases where it is difficult to determine if there is a separate supply of goods that is excluded from the reverse charge, or whether they are to be included as part of a single supply of construction services.  In these cases, a business will need to consider the position further to ensure the correct VAT treatment.

What is required on invoices for supply of these services?

Invoices for services subject to the DRC must include all the information required on a normal VAT invoice and they must make it clear that the DRC applies and that the customer is required to account for the VAT. HMRC suggests the following wording:

• “Reverse charge: VAT Act 1994 Section 55A applies”
• “Reverse charge: S55 VATA 94 applies”
• “Reverse charge: Customer to pay VAT to HMRC”.

If a customer issues authenticated tax receipts or self-billing invoices HMRC’s recommended wording is:

• “Reverse charge: we will account for and pay the output tax due to HMRC”; or
• “Reverse charge: as the UK Customer we will pay the VAT due to HMRC”.

The new rules seem simple in concept but can be complex in the detail, and construction businesses will need to be fully aware of their obligations to avoid creating unnecessary VAT costs.

If you’d like further advice, do not hesitate to contact Gemma directly: Gemma.Mcaldon-gower@cowgills.co.uk