VAT registered businesses that buy or sell construction services need to be aware of a new measure effective from 01 October 2019. Clients using the VAT Flat Rate Scheme may be particularly affected.
A domestic VAT reverse charge is being introduced for construction related supplies, which will apply to supplies between VAT registered businesses in the construction industry. See HMRC’s Guidance note and HMRC Policy paper, reverse charge for building and construction services
In general it will apply to supplies, at standard rate or reduced rate, between sub-contractors and contractors, but will not apply to supplies to an end user. Supplies affected are pretty much everything:-
- Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
- Construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- 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 internal or external surfaces of any building or structure.
It also applies to services which form an integral part of, are preparatory to, or are for rendering complete, the services described in the bullet points 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.
Flat Rate Scheme
Clients using the Flat Rate Scheme should give special consideration to whether they should continue to use the scheme after 01 October 19.
The issue is that reverse charge supplies are excluded from FRS. This means that if you only make reverse charge supplies your FRS VAT returns will be nil, in which case you will not receive any benefit for your input tax. Normally when using FRS, you pay HMRC less ‘output tax’ than that you have charged your customers, based on the difference between 20% and your FRS rate, with this difference giving you what is in effect an allowance for your input tax. If you have no FRS supplies to declare, you will lose this benefit.
Where a supply includes a reverse charge element, the whole supply will be subject to the reverse charge.
For any queries on this new charge, get in touch with our VAT team who will be happy to help.