New Rules for Building and Construction Services – are you ready? A new reverse charge for building and construction services will take effect from 1 March 2021

How it works

For example, builders will no longer charge VAT on their sales invoices if they fall within the new rules.

The key questions to look at when determining whether the reverse charge is relevant are as follows:

1. Is their customer VAT registered?
2. Is their customer registered for the Construction Industry Scheme?
3. Does the work in question fall within the scope of the Construction Industry Scheme?
4. Is the customer an “end-user” or “intermediary supplier” for any of the work?

If the answer is “yes” to the first three questions and “no” to the fourth, the sales invoices issued will be subject to the new reverse charge rules.

For example, the reverse charge for builders will only apply to jobs that they carry out for construction industry clients who are making an onward supply of services to another person or business, i.e. the typical subcontractor and contractor arrangement. So, if the builder fits a bathroom suite in a new hotel, where they invoice the main contractor and the main contractor invoices the hotel. The builder’s sales invoice will be subject to the reverse charge, but the invoices issued by the main contractor to the hotel will charge 20% VAT in the normal way.

The new rules will also apply to any materials supplied by the builder as part of their work. The rules apply to building work that is subject to either 5% or 20% VAT, i.e. zero-rated sales are unaffected.

Example

John is a bricklayer and invoices ABC Construction Ltd on 1 April 2021 for standard-rated work on a commercial property, which is covered by the new reverse charge rules. The invoice includes £8,000 for bricks and £2,000 for labour. John will charge £10,000 and no VAT. The VAT of £2,000 will be accounted for by ABC Construction Ltd in Box 1 of its next VAT return, and input tax claimed for the same amount in Box 4. The net value of the expense will be included in Box 7, the inputs box. The only entry on John’s VAT return will be to include £10,000 in Box 6, the outputs box.

Invoicing

If your services are subject to the reverse charge then you must include wording on each sales invoice along the lines of: “Reverse charge: customer to pay the VAT to HMRC” . The amount of VAT (or at least the rate) must be shown on the invoice as well, so the customer is clear what to declare on their return.

Notification

Contractors will need to review their contracts with subcontractors to see if the new VAT reverse charges apply to the services they receive. If it does, the contractor will need to notify its subcontractors accordingly. Likewise, subcontractors will need to get information from their contractors as to whether the reverse charge will apply

The aim of the reverse charge is to reduce VAT fraud in the construction industry. HMRC wants to stop a supplier of construction services from invoicing another builder and charging VAT but disappearing or going into liquidation before the VAT paid by the customer is declared on a VAT return sent to HMRC. This is known as “missing trader” fraud.

Further Reading:

 HMRC Guide to how to use the VAT reverse charge if you supply building and construction services

Covid 19 – Can I claim back VAT