This fundamental change to VAT within the construction industry has already been postponed twice, as we explained on 11 June 2020. But now we have confirmation from HM Treasury that the domestic reverse charge will definitely come into effect on 1 March 2021.
Building sub-contractors will no longer charge VAT to other businesses in the construction industry, but instead their building company customers will account for the VAT as both a purchase and sale by doing a reverse charge entry on their own VAT returns.
This VAT reverse charge only applies for invoices where all three conditions apply:
- the work done would be subject to 20% or 5% VAT (not zero rate)
- the work falls within the scope of the construction industry scheme (CIS)
- the customer is registered for both CIS and VAT.
The subcontractor needs to confirm that its customer (the contractor) is VAT registered. This can be done using the new VAT number checking service, which can only be used by a business that is already VAT registered.
The VAT reverse charge will apply to materials supplied as part of the building work, irrespective of whether the subcontractor raises separate sales invoices for labour and goods.
The reverse charge should not be applied where the customer is an ‘end user’ or ‘intermediary’ supplier for the work in question, as ion these cases the work will not be charged on to another customer. The end user status is self-assessed by the customer.
An example of an end user is where electrical work is undertaken in the contractor’s own office building. An ‘intermediary’ is a business connected with the end user by being in the same corporate group, or by having an interest in the same land, such as landlord and tenant would.
In advance of 1 March 2021, building firms need to check that their accounting software will cope with not applying VAT on some invoices, and dealing with the reverse charge on other invoices. It should also verify the VAT numbers of all its regular customers.
Smaller building firms may also wish to exit the flat rate scheme for small businesses.
Written by the Tax Advice Network