The VAT domestic reverse charge for building and construction services is a system for which the supplier of services and materials to a construction company will no longer handle the VAT payments to HMRC. Instead, the customer receiving such services - or the construction company - will be in charge of taking care of such payments. 

 

For this type of transaction to be possible, both parties need to be VAT-registered and subscribing to the UK CIS or the Construction Industry Scheme. These new changes will apply to standard VAT rates, as well as reduced-rate VAT charges. 

 

So, when a supplier sends an invoice to its customers, these will only include the amount charged for its services, excluding the VAT charge. However, there will need to be a statement that declares that this happens because of the VAT reverse charge system. Then, it will be a responsibility of the customer or construction company to pay this output tax directly to HMRC. 

 

Simply put, sub-contractors such as suppliers for materials and services in the construction industry will need to notify the company they supply these services to regarding the fact that they will need to pay the VAT themselves. 

The majority of the services and materials supplied by a sub-contractor to a construction company will be subjected to the new scheme. These include the following: 

 

Constructing, repairing, altering, extending, demolishing, and dismantling including... 

 

Also included are installations of most systems such as heating, power supply, drainage, sanitation, lighting, air-conditioning, ventilation, water supply or fire protection, as well as services for the internal cleaning of buildings and structures. This includes painting or decorating and complementary construction services. 

 

Services that are excluded include the following: 

 

The reason for which this system has been introduced is to fight fraud by some suppliers who HMRC suspect of charging additional VAT amounts to their customers, and then not actually paying it back to the taxman. 

 

Such suppliers keep the extra amount that should be paid in, which usually adds up to between 5% and 20% of the total invoiced amount. And, as these suppliers keep the VAT amount, they can actually offer their services to their customers for infinitely lower prices. Their unfair competition has been hurting honest suppliers who offer competitive prices due to the added VAT. Moreover, the overall industry is suffering from the attack of such organised criminals. 

 

By moving the responsibility to pay the VAT to HMRC to the receivers of such services, the suppliers will only invoice the real cost of their services. 

 

While definitely beneficial for the honest companies in the industry, it is also worth keeping in mind that this can affect the level of cash flow for the company (since you won’t be receiving the extra 20%). However, this can easily be solved by planning for these changes in the industry. 

If you're concerned about these changes at all, or have any questions about how it might affect you, please don't hesitate to get in touch with us today for a no-obligation chat.