Domestic Reverse VAT Charge: what does it mean for building and construction services?
The Domestic Reverse VAT Charge (DRC) for building and construction services represents a significant shift in the administration of VAT for the construction industry within the UK. With the VAT onus moving from supplier to the customer, implementation of the DRC could bring unwelcomed concerns for some businesses; the only solace being a statement from the HMRC that it will “apply a light touch in dealing with any errors made in the first six months of the new legislation, as long you are trying to comply with the new legislation and have acted in good faith”. What this means in practice is still too early to tell. Moe Yassin, Associate with Beyond Corporate’s specialist Construction team, takes a closer look.
What is the DRC?
Introduced as mechanism designed to tackle VAT fraud, the DRC essentially requires a “customer” within the construction industry who receives the supply of construction service to pay the VAT due on that service direct to the HMRC rather than making direct payment of the VAT to the “supplier”.
Who is a “customer”?
Customers are individuals and business who are (1) registered for VAT in the UK and (2) who supply or receive services) where payments are required to be reported through the Construction Industry Scheme (CIS).
When did the DRC come into force?
The DRC was implemented through Section 55A of the VAT Act 1994 which came into force on 1st March 2021 and applies to standard and reduced-rate VAT services.
What does “building and constructions services” include?
Savvy readers will have been quick to spot the parallels with “construction operations” as defined in the CIS and section 105 (1) of the Housing Grants, Construction and Regeneration Act 1996. Examples of services include:
* constructing, altering, repairing, extending, demolishing or dismantling buildings or structures
* Alterations, repairs and extensions
* Installation works including heating systems, lighting, ventilation, air conditioning, power supplies, drainage, sanitation, water supply or fire protection
* Internal cleaning of buildings and structures (so as long as these works are carried out during the course of construction, alteration, repair, extension or restoration)
* Painting/decorating of the internal or external surfaces of any building or structure
* preparatory or completion services e.g. site clearance, excavation, foundation, erection of scaffolding
Are there any exempt activities?
Yes, essentially the same exemptions as set out in section 105 (2) of the Housing Grants, Construction and Regeneration Act 1996.
The DRC refers to “end users”, who are they?
An end user is a business, or group, which is VAT and CIS registered but does not make onward supplies of building and construction services. If a customer qualifies as end-user, the DRC does not apply (but the customer must notify the supplier or building contractor in writing to confirm it is an end-user).
The DRC also refers to intermediary suppliers who are essentially suppliers that buy construction services and re-supply them to an end-user (or linked to an end-user) but do not make material alterations to those supplies. A customer who meets the criteria of an intermediary supplier will be treated the same as an end-user.
Is anyone else exempt from the DRC?
Employers who supply construction workers are treated as supplying staff (rather than building and construction services) and are subject to the normal rules of VAT.
Similarly, where a labour-only sub-contractor is supplying staff and it is the customer who bears the responsibility for overseeing the works, the DRC does not apply.
If the labour-only sub-contractor is supplying labour and is also responsible for overseeing the completion of the works carried out, the DRC does apply.
I am an end-user or intermediary supplier, what do I do?
It is the customer’s responsibility to notify the supplier in writing of its status as an end-user or intermediary supplier. Notification can be by post, email or in a contract (e.g. the building contract) provided the contract is agreed.
The HMRC has suggested an example of the wording to use:
“We are an end-user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”
If written notification is not given, the customer will be liable to account for the VAT that ought to have been charged under the DRC. The supplier will be required to proceed as if the DRC applies and will not charge VAT to the customer.
It sounds like the DRC applies to my business, what should I do?
* Consider the impact on cash flow following the implementation of the DRC (for example not receiving VAT you were expecting to receive)
* Seek notification from customers of their VAT and CIS registration status but the onus remains with the customer to notify the supplier in writing
* Carry out a review of supplies you make and receive from other VAT registered contractors in order to establish where these will be subject to DRC from 1 March 2021
* Do not pay VAT to a supplier who should not be receiving that VAT!
DRC must be applied properly, and VAT correctly charged, or there is a risk of penalties and interest being charged by HMRC for breach of the DRC rules. The onus will be on the customer to account for the reverse charge VAT within its own VAT return, but it will be able to recover the VAT in the usual way, subject to the normal recovery rules.
Failure to understand the implications of the DRC could result in businesses unwittingly breaching the rules and ultimately being liable to account to HMRC for VAT that has already been paid to a supplier. Your best option is to consult an experienced lawyer. Get in touch today, we’re here to help.