What is VAT reverse charge in the construction sector?

New legislation is changing the way businesses in the construction industry process their VAT liability and it’s important to be aware of how this could impact you. Coming into force on 1st October 2019, the VAT reverse charge policy doesn’t have a transitional period. This means you’ll need to be up-to-date and ready to apply the VAT reverse charge in appropriate circumstances from 1st October onwards.

What is the VAT reverse charge?

In a standard transaction, a supplier may charge a buyer for goods or services, plus VAT. When the VAT reverse charge is applied, however, a supplier will charge a buyer for services but not VAT. Instead, their invoice will state that the service is subject to the reverse charge.

Instead of the supplier paying the VAT to HMRC, the onus is on the recipient to make this payment. When submitting a VAT return, businesses who have been in receipt of services subject to the VAT reverse charge will need to declare this and pay the relevant amount of tax. Of course, this may be recoverable via the usual rules regarding input tax. 

Who does the VAT reverse charge apply to?

The VAT reverse charge will affect the majority of businesses operating within the construction sector. Whilst it only applies to select services, these span a fairly wide area. For example, the VAT reverse charge will be applicable to services including:

  • Demolition
  • Alteration
  • Construction
  • Repairs
  • Extension
  • Civil engineering
  • Painting and decorating
  • Installation of lighting, heating and/or air conditioning

Essentially, anything which his defined as ‘construction operations’ in accordance with the Construction Industry Scheme (CIS) definition is likely to be subject to the VAT reverse charge.

How does the VAT reverse charge affect the supply chain? 

In reality, a supply chain may be comprised of multiple suppliers, vendors and subcontractors. According to the legislation, if one transaction in a supply chain is subject to the VAT reverse charge, the whole supply chain becomes liable too. 

If Subcontractor A supplies services to Subcontractor B, who then supplies services to Main Contractor C, for example, the reverse charge is passed on to the user who doesn’t continue the onward supply of service. 

Calculating the VAT reverse charge

Any changes to tax liability and accountancy can be tricky to deal with. Whilst the VAT reverse charge may appear simple at first, it’s important to seek specialist advice and tax help to ensure you’re implementing it correctly. 

Furthermore, smaller businesses may want to seek advice from accountants to confirm that the liability under the VAT reverse charge won’t push them over the threshold for VAT registration. (Good news, it won’t!).

Fortunately, specialist tax accountants can help you determine your liability under the new VAT reverse charge scheme and ensure that your firm is implementing it in accordance with the latest legislation. 

If you operate within the construction industry and you want to learn how the VAT reverse charge could apply to you, why not contact experienced Exeter accountants now? Call Kirk Hills Chartered Accountants now on 01392 494 904 to find out more.