The domestic reverse charge is a major change to the way VAT is collected in the building and construction industry.
Coming into effect on 1 October, 2020 it will mean the customer receiving the service should pay the VAT due to HMRC not the supplier.
It will only apply to individuals or businesses registered for VAT in the UK.
If you supply or receive specified services that are reported under the Construction Industry Scheme (CIS) then you will be affected.
Preparing for the Domestic reverse charge
By the 1st October 2020 you need to ensure the following:
- check if the reverse charge affects either your sales, purchases or both
- make sure your accounting systems and software are updated to deal with the reverse charge
- consider whether the change will have an impact on your cashflow
- make sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate
If you are a Contractor you also need to review your contracts with sub-contractors to decide if the reverse charge will apply to the services you receive. Suppliers should be notified.
If you are a Sub-contractor you also need confirmation from your contractors if the reverse charge will apply. This includes confirming it the customer is an end user or intermediary supplier.
Services affected by the domestic reverse charge
The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies.
The difference between CIS and the reverse charge where materials are included in a service is that the reverse charge applies to the whole service whereas CIS is the payments to net status sub-contractors who have no deductions made for materials.
The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.
It also does not apply to some services. These are those supplied to end users or intermediaries connected with end users. Find out more found in the End users and intermediary supplier businesses section.
Employment businesses who supply staff and are responsible for paying the temporary workers are not subject to the reverse charge.
You will have to apply the reverse charge if you supply any of these 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 preparation/ completion of 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
Services excluded from the domestic reverse charge
The following services are not subject to the reverse charge:
- 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 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
How does the domestic reverse charge work?
The domestic reverse charge works by placing the onus to pay the VAT to HMRC, onto the customer receiving the service. Removing the responsibility from the supplier. This will mean that the customer can reclaim the VAT as per the normal VAT recovery rules.
End users – If you are a consumer or a final customer of building and construction services then the reverse charge does not apply to you.
For reverse charge consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question.
Intermediary suppliers – If you are a VAT and CIS registered business that is connected/linked to the end user then you are and intermediary supplier.
This flowchart shows whether to apply normal VAT rules, or apply the domestic reverse charge.
If you would like further advice on this subject contact AJR & Co Ltd to arrange a free 30 minute consultation.