Running a construction business is complicated. You have to manage suppliers, subbies and customers, ensure you stay compliant with ever-changing regulations, and try to make a profit when costs seem to rise almost constantly.
As if that wasn’t enough to contend with, HMRC seems intent on making life even harder by continually changing the tax rules.
Keeping on top of accounts is tricky for any business, but construction firms have the added hassle of CIS. And if you’re registered for VAT, that isn’t straightforward either because of the domestic reverse charge that was introduced a few years ago.
The domestic VAT reverse charge applies when a UK VAT-registered business supplies certain construction services to another UK VAT-registered business that is not the end-user.
It makes sense in theory – you’re cutting out the middlemen by getting the end customer to pay VAT instead of passing it all the way along the supply chain. But it does make more work for VAT-registered businesses in the construction sector.
What does VAT reverse charge mean for construction businesses?
If you’re not registered for VAT, then you won’t need to worry about the domestic reverse charge. But if you are registered for VAT (and you operate in the construction sector), it’s worth understanding the basics.
Under normal VAT rules (brought in under the VAT Act in 1994), a registered company has to add VAT (Value Added Tax) to the cost of most goods and services. The VAT is then passed onto HMRC. This is referred to as output tax. The current standard VAT rate is 20%.
The domestic reverse charge (or VAT reverse charge) was introduced in 2021 to combat fraud. Too many companies were charging VAT to their customers but not passing it on to HMRC.
The VAT reverse charge means VAT is no longer passed along the supply chain. Instead, it is recorded on VAT invoices but is only paid when it reaches the end user.
To make things complicated, the reverse charge only applies to certain construction services. Normal VAT rules apply to everything else.
The VAT reverse charge applies to the following services
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), 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 purposes of 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, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
The VAT reverse charge does not apply to
- Businesses or sole traders that are not VAT-registered
- Any employees and temporary workers your business is responsible for paying
- Zero-rated VAT supplies
- Work done outside of the UK
- End-users and intermediary suppliers
When should you reverse charge VAT?
It is likely that if you are construction industry scheme-registered and VAT-registered, you will come across reverse charge services at some point.
You should use the reverse charge if you’re VAT registered in the UK, supply building and construction services and:
- your customer is registered for VAT in the UK
- payment for the supply is reported within the Construction Industry Scheme
- the services you supply are standard or reduced rated
- you’re not an employment business supplying either staff or workers, or both
- your customer has not given written confirmation that they are an end user or intermediary supplier
You should use the reverse charge if you’re VAT registered in the UK, you buy building and construction services and:
- payment for the supply is reported within the Construction Industry Scheme
- the supply is standard or reduced rated
- are not hiring either staff or workers, or both
- you’re not using the end user or intermediary exclusions
Who does reverse charge VAT apply to?
The domestic reverse charge applies to UK businesses that are registered for VAT if they supply or buy applicable construction services from other UK VAT-registered contractors. The idea of the reverse charge is the VAT is only paid at the end of the supply chain.
For example, if you are a subcontractor supplying construction services to a main contractor who is supplying services to an end user (for example, a housebuilder) and both you and the contractor are registered for VAT, the reverse charge applies.
You are likely to be affected by the VAT reverse charge if you supply construction services to other contractors, use labour-only subcontractors or provide labour-only construction services.
If in doubt, leave it to VAT experts
If you charge VAT, it is important that you use the correct VAT treatment and make the correct VAT payments. Any VAT invoice you raise should include details of any domestic reverse charge VAT that applies, even if you are not physically receiving the money. And any VAT return you submit will need to include the correct input VAT and output VAT amounts.
This is why it is important to have good accounting systems and a proper understanding of the reverse charge rules.
If you supply construction services and can’t get your head around the reverse charge, it’s worth getting a bookkeeper or accountant (preferably one who understands the construction sector). Let the experts take care of balancing your books.
Speaking of experts…
We’re not experts in accounting or tax law, so we can’t complete your VAT return or tell you what your VAT liability is.
What we can do is ensure you can work with your subbies long-term without upsetting HMRC or using a payroll company.
That’s because the thing we are experts in is creating bespoke subcontractor contracts that outline how you work with subbies and your reasons for working this way.
We then protect them with our insurance-backed guarantee and get them signed by your subbies electronically using our fancy software.
It means working with subbies long-term is one less thing you’ll need to worry about (leaving you plenty of time to figure out the VAT rules instead).
Find out more about our services or get in touch to get your subcontractor agreements in place.