Curtailing fraud in the payment of VAT in the construction industry, the HMRC introduced legislation of VAT reverse charge construction. New Vat charges reverse the Vat from the end user to the contractors and pay the invoices to the HMRC. In a normal VAT system, the end user pays the taxes at each point of sale. However, a VAT registered to CIS (Construction Industry Scheme) contractor will be liable to pay the VAT, avoiding fraud in the process.
In this blog, we will discuss what is VAT and Domestic Reverse charges for construction. Moreover, we will discuss the 10 most crucial things involved in this new process for all the suppliers, contractors and subcontractors. So, let’s start our informative discussion!
1. What are VAT and Domestic Reverse Charge?
Vat is a tax paid by the end-user and it is calculated at each point of sale, from business to business and from business to end user. The supplier pays the collected VAT to the HMRC in the end.
On the other hand, a domestic reverse charge is applicable when a contractor hires a subcontractor. The subcontractor supplies goods and services to the contractor and sends an invoice, including VAT, to the contractor.
The contractor submits the VAT invoice to the HMRC and can claim the VAT paid. In other words, the subcontractor or the supplier of the construction services and materials will not pay VAT. Instead, the recipient of the services will make the VAT payments directly to the HMRC.
This legislation was supposed to be made effective in 2019. However, it was delayed due to Covid-19 and the non-preparedness on the part of the businesses. So, this became effective on 1st March 2021.
2. VAT Rates in Domestic Reverse Charge
The same Vat rates are applied for the Vat-Registered constructors under the domestic reverse charge. The following are the rates applicable on the construction supplies:
- Standard rates of 20%
- Reduced rates of 5%
- Zero Rate
3. Who is Responsible for Paying Vat Reverse Charge?
VAT reverse charge construction is applied to a contract between a Vat-Registered contractor and Vat-registered sub-contractors. So, if you are receiving construction services and receive an invoice of reverse VAT from the subcontractor, you are supposed to pay the tax as a part of your regular VAT.
If you are not VAT registered, then the Vat reverse charge does not apply to your business and you will pay only regular VAT. On the other hand, if either the supplier or the receiver is not VAT registered, he has to mention it in the contract in written form.
4. Construction Services for Paying VAT Reverse Charge
The following construction services are eligible for the VAT domestic reverse charge:
- installation in any building or structure of systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
- painting or decorating the internal or external surfaces of 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
- construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
It also includes any construction materials used directly used in the services mentioned above in the list. However, these services are different from Construction Industrial Scheme (CIS) as CIS does not cover the materials used in the construction.
5. Services Exempted from VAT Reverse Charge
The following construction services, however, have been exempted from the VAT reverse charge construction in the United Kingdom by the HMRC:
- sign writing and erecting, installing and repairing signboards and advertisements
- drilling for, or extraction of, oil or natural gas
- the installation of seating, blinds and shutters
- extraction (whether by underground or surface working) of minerals and tunnelling or boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to the site
- the making, installation and repair of artistic works, being sculptures, murals and other works that are wholly artistic in nature
- manufacture of components for systems of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to the site
- the installation of security systems, including burglar alarms, CCTV and public address systems
- the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying out of the landscape
6. Minimum Threshold Required for the Domestic Reverse Charge
As per the rules described by the HMRC, there’s no minimum threshold required to pay the VAT reverse charge. So, if a business is VAT registered, they have to make VAT payments to the HMRC.
7. 5% Disregard For VAT Reverse Charge
If an invoice consists of several parts and some of its components consist of those services counted as CIS reverse charge rules, then the business will not pay VAT reverse charge if that component is less than the 5% of the total invoice.
In conclusion, we can wrap up by saying that VAT is applicable only to the recipient of the construction services and the business must be VAT registered and CIS registered. If it is not, they have to inform the suppliers in written form.
The Vat reverse charge construction applies to certain construction services and materials. So, a business has to read all of these guidelines on the official website of HMRC, to ensure they comply with the rules to avoid any penalty later.
Disclaimer: All the information provided in this article on VAT reverse charge construction, including all the text and graphics, is general in nature. It does not intend to disregard any of the professional advice.