Constriction firms are likely to encounter many rules, including the construction industry scheme and IR35. Another is the VAT reverse charge, extended to the sector in March 2021.
Here’s a comprehensive guide to help you navigate the VAT reverse charge effectively.
What is the VAT reverse charge?
The VAT reverse charge rules state that when a VAT-registered business supplies goods or services to another VAT-registered business, the supplier has to issue a VAT invoice stating that the goods or service is subject to the domestic reverse charge. You shouldn’t charge VAT, but no VAT will be added. However, it should still be shown on the invoice.
Crucially, instead of paying VAT to the supplier, the recipient must show the VAT due on a VAT return it draws up itself; it can then recover the VAT as input tax.
So, if you’re a VAT-registered construction firm providing services to another VAT-registered business, you won’t charge VAT on your invoice. Instead, the customer will account for the VAT on their VAT return.
When you must use the VAT reverse charge
For certain work, you must use the VAT reverse charge; for other types of work, you’re not supposed to use it. You should refer to the normal VAT rules where the reverse charge doesn’t apply.
When you must use the VAT reverse charge
- Constructing, altering, repairing, extending, demolishing or dismantling buildings or structures, whether permanent or not (including offshore installation services).
- Constructing, altering, repairing, extending or demolishing works formed, or planned to form, part of the land (such as power lines, walls, railways, etc.)
- Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
- Cleaning of buildings and structures when carried out during 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 that are integral to preparing or completing the services, including site clearance, earthmoving, excavation, tunnelling, and boring.
When you shouldn’t use the VAT reverse charge
- Drilling for, or extracting, oil or natural gas.
- Extracting minerals (using underground or surface working). This also includes costs associated with tuning, boring, or constructing underground works to extract minerals.
- Manufacturing engineering components, equipment, materials, and plant and machinery. You should also use the normal VAT rules for costs related to delivering any of these to the site.
- Manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems or delivering any of these to the site.
- Work of architects, surveyors or consultants.
- Making, installing and repairing artworks such as sculptures, murals and other purely artistic items.
- Costs related to 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.
Managing the reverse charge
Construction companies need to update their invoicing and accounting systems to properly process supplies covered by the VAT reverse charge. This will help them manage common mistakes, such as accounting VAT to HMRC when they should have used the VAT reverse charge.
Construction firms must also understand whether they work for a VAT-registered business or an end client such as a landlord or tenant. The VAT reverse charge only applies when both the supplier and recipient are registered for VAT.
Finally, if you’re ever confused with anything, don’t hesitate to get in charge with an accountant. They’ll use their expertise to help you, no matter the case’s complexity.
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