VAT Domestic Reverse Charge for Building and Construction Services

Published on 1^st March 2021

From today (1 March 2021) the domestic VAT reverse charge must be used for most supplies of building and construction services.

The charge applies to standard and reduced-rate VAT services:

• for individuals or businesses who are registered for VAT in the UK
• reported within the Construction Industry Scheme

What is the VAT Domestic Reverse Charge for Building & Construction Services and who will it affect?

HMRC has introduced the VAT domestic reverse charge for building and construction services to be enforced from today, 1^st March 2021.

The new VAT reverse charge rules will impact certain Construction Industry Contractors, Trade Contractors and Subcontractors with the aim to defend against on-sale fraud in the construction sector. VAT-registered Contractors who supply construction services to another VAT-registered business will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.

The business in receipt of the services must declare the VAT due on that supply to HMRC via a VAT return instead of paying the amount directly to the contractor. In short, the ‘customer receiving the service will have to pay the VAT due to HMRC instead of paying the supplier’.

HMRC guidance sets out what you need to do to be ready for the start of the domestic reverse charge which includes:

• checking whether the reverse charge affects either your sales, purchases or both
• making sure your accounting systems and software are updated to deal with the reverse charge
• considering whether the change will have an impact on your cashflow
• making sure all your staff who are responsible for VAT accounting are familiar with the reverse charge and how it will operate

HMRC guidance clearly outlines when you must use the reverse charge for 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 described above – 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

When you must not use the reverse charge

Do not use the charge for the following services, when supplied on their own:

• drilling for, or extracting, oil or natural gas
• extracting minerals (using underground or surface working) and tunnelling, 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 site
• the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
• making, installing and repairing art works such as sculptures, murals and other items that are purely artistic signwriting 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

Further information and guidance can be found here on the HM Revenue and Customs website

More information and visual aids can be found on the VAT Reverse technical guide.