VAT: Reverse Charge - Construction Services

Important Information

Significant changes are being introduced to the VAT treatment of supplies in the construction industry from 1 October 2019.

What are the VAT changes?

From 1 October 2019 all VAT being paid between construction firms, i.e. contractor to subcontractor and subcontractor to subcontractor, will be 'reverse charged' i.e. the VAT will not be paid to the subcontractor, it will be paid direct to HMRC.

Who is affected by these changes?

The new rules apply to ‘construction services/operations’. The definition of which, is the same as that used in the Construction Industry Scheme (CIS) therefore, will be familiar to most businesses in the industry.

The categories of construction services affected by the VAT changes include:

  • general construction,
  • groundwork construction,
  • renovations and maintenance services,
  • internal cleaning of buildings (carried out in the course of construction, extension, etc)
  • painting and decorating of buildings and structures.

The new rules will only apply on supplies between VAT registered businesses in circumstances where the recipient makes an onward supply of construction services. This means the VAT treatment of supplies to the final customer (e.g. property owner) will not change. The rules will only apply to standard rated and reduced rated supplies.

How the reverse charge will work?

Under the reverse charge, a VAT-registered business that supplies certain construction or building services to another VAT-registered business for onward sale is required to issue an invoice stating that the service is subject to the domestic reverse charge. The recipient/customer, if it is VAT registered, must then account for the VAT due on that supply via its VAT return at the appropriate rate, instead of paying the VAT to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules – this would normally mean a nil net tax position with no VAT being due to HMRC.

Next steps

The latest guidance from HMRC can be found here. We will also publish further information as soon as HMRC finalises the details.

What can you do now?

Business should review supply chains to consider how they will be impacted by the changes. It will be important to identify the categories of supplies which may be subject to the new reverse charge rules. Note that supplies in the construction industry can potentially be subject to VAT at 0%, 5% or 20%. Therefore, you will need to determine which VAT rate applies and whether or not the services received will be subject to reverse charge.

HSJ are here to help you

Should you wish to discuss this, or any other VAT related issues please do not hesitate to contact us.

See the below flowchart to determine if these new rules apply to you:

VAT Reverse Charge - Flowchart

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