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VAT – Domestic Reverse Charge for Construction

Soham Accountant and Bookkeeper

Construction Industry Accounting

What is the Domestic Reverse Charge?

The domestic reverse charge is a change to how VAT is collected in the construction industry, which came on 01st March 2021.

Who does it Affect?

 

The domestic reverse charge affects the construction industry. It applies to building and construction supply transactions that are already reported through CIS, where the contractor and sub-contractor are both VAT registered.

What does this mean for sub-contractors?

 

The domestic reverse charge means that sub-contractors who provide services to VAT-registered suppliers no longer have to account for the VAT on their services themselves. Instead, customers account for this VAT, which is classed as input VAT.

The changes that affect the sub-contractor means that the payments that they are receiving are now for the work done, with any materials used added, net of CIS deductions, and void of any VAT that would previously have shown on the invoice.

Domestic Reverse Charge affects the contsruction industry

Steps to Determine if the Domestic Reverse Charge Applies:

  1. Are any of the supplies you make within CIS?

  2. Is the supply standard or reduced rate?

  3. Is your customer VAT registered?

  4. Is your payment reported under CIS?

  5. Are you sure that the customer is not an end-user?

 

If the answer to these questions is positive, then the reverse charge applies to you.

For more information about end-users, click here. 

 

What Supplies are Specified Construction Services?

 

As well as the below-specified construction services, the reverse charge also applies to materials supplied with those construction services.

If a supply includes a mixture of specified and excluded construction supplies, it is classed as a single supply of specified services, and the domestic reverse charge will apply.

Specified construction services include:

  • constructing, altering, repairing, extending, demolishing, or dismantling buildings or structures (whether or not permanent), including offshore installation services
  • constructing, altering, repairing, extending, demolishing of any works, forming or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks, and harbours
  • pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for land drainage, coast protection, or defence
  • installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply, or fire protection systems in 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
  • painting or decorating the inside or the external surfaces of any building or structure
  • services which form an integral part of, or are part of the preparation or completion of the services described above - including site clearance, earth-moving, excavation, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping, and the provision of roadways and other access works.

What are Excluded Supplies?

 

The domestic reverse charge does not apply to the following supplies:

  • drilling for, or extracting, oil or natural gas
  • extracting minerals (using underground or surface working) and tunneling, boring, or construction of underground works, for this purpose
  • manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to 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
  • the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
  • making, installing, and repairing artworks such as sculptures, murals, and other items that are purely artistic
  • sign-writing and 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.

Flowcharts

 

If you sell building and construction services, use the following flowchart to establish whether you need to use the reverse charge. The reverse charge will need to be used when:

 

  1. Your customer is registered for VAT in the UK

  2. Payment for the supply is reported within the Construction Industry Scheme (CIS)

  3. Services you supply are standard rate or reduced rate

  4. You are not an employment business

  5. Your customer has not given written confirmation they are an end-user or intermediary supplier

 

Click here for the supplier's flowchart.

 

If you buy building and construction services, use this flowchart to help you decide if you need to use the reverse charge.

The domestic reverse charge will need to be used when:

 

  1. Payment for the supply is reported within the Construction Industry Scheme (CIS)

  2. The supply is standard rate or reduced rate

  3. You are not hiring either staff, workers, or both

  4. You aren't using the end-user or intermediary exclusions

 

Click here for the buyer's flowchart.

 

If you need any help to implement the reverse charge VAT changes or anything else relating to your construction business, contact me today to discuss!

Already successfully implementing the domestic recharge in your business? Comment and tell me your success stories and whether it has had a positive or negative effect on your business.

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