VAT changes for construction sector

The VAT treatment of construction services is changing. Are you affected? H MR C believes that around £100 million of revenue is lost each year from fraud within the construction sector.

To combat this, HMRC has introduced a domestic VAT reverse charge procedure to the construction sector. From 1 March 2021 businesses in the construction industry need to apply a domestic reverse charge on payments that are subject to the Construction Industry Scheme (CIS).

The domestic reverse charge will apply to construction services that are reported under the CIS and goods that are supplied as part of these services. It will apply to “mixed invoices” i.e. invoices that cover both supplies that are subject to CIS reporting and supplies that do not. If payments are not subject to CIS reporting, the domestic reverse charge will not apply.

In practice therefore, the change will result in some suppliers of construction services not charging VAT on their sales and their customers having to self-account for VAT on their VAT returns. Customers that have to self-account for VAT will be allowed to record an equal value as input VAT and can recover this according to normal rules. For businesses that cannot recover all of the VAT they incur, this will result in a VAT cost. HMRC guidance states that businesses supplying construction services must not charge VAT to their customers when the customer is registered for VAT in the UK and the customer uses the services to make onward supplies of construction services.

Typically, the changes will affect supplies between main contractors and sub-contractors but will not apply where construction services are supplied to final consumers.

For the domestic reverse charge, the supplier’s invoice must show all information normally required on a VAT invoice. Whilst the VAT amount due should be clearly stated, it must not be shown as VAT charged. The invoice must also include a reference to the domestic reverse charge.

The supplier only completes Box 6 on its VAT return, i.e. it only declares the net value of the sale. The customer completes Box 1 (the VAT amount), Box 4 (the input tax amount) and Box 7 (the net value of the sale).

It is clear that many businesses involved in the construction industry still need to familiarise themselves with the new rules. Additionally, they should plan for the impact on cash flow, paperwork, accounting and VAT.

HMRC’s website offers guidance and examples of typical scenarios. Alternatively, seek advice from your accountant.