The VAT reverse charge is one of the more complex changes to UK tax law in recent years. Originally intended to come into force on 1 October 2019, it was delayed twice: once because businesses were unprepared and again because of the pandemic.
The new law finally came into effect in March 2021, but many in the construction industry are still unsure of their obligations. In this blog, we’ll do our best to clear up the confusion.
What is the VAT reverse charge?
The VAT reverse charge shifts the responsibility for paying VAT on construction projects. In the past, you would charge your customers VAT as part of their bill. Now, you account for the VAT in the bill, but the customer is responsible for paying this VAT directly to HMRC.
This change is intended to reduce fraud in construction supply chains. It prevents suppliers from charging customers for VAT, only to keep the additional money for themselves – a practice that has unfortunately become more common in recent years.
Who does the reverse charge apply to?
The VAT reverse charge applies to the sale of construction goods or services in any case where:
- Both the supplier and the customer are registered for UK VAT
- The payment is reported under the Construction Industry Scheme
The law is intended to target supply chains rather than “end users”. This means that a customer does not have to pay the reverse charge if they do not also provide construction services themselves. Examples of this would be:
- A retailer that has hired a contractor to refurbish their store
- A tenant receiving construction services from their landlord
In the original version of the law, this exemption was applied automatically. However, this was amended in July 2020. It is now up to the customer to notify you if they are exempt from the reverse charge. Some end users may choose to waive the exemption in order to gain cashflow benefits. This is perfectly legal.
What work is covered?
The government has a strict definition of which activities are covered by the reverse charge. This includes most standard construction practices such as:
- Constructing, altering, repairing, extending, demolishing and dismantling buildings or structures
- Installing heating, lighting, power, drainage and ventilation in buildings
However, some activities are excluded from the reverse charge. These include:
- Drilling for oil
- Extracting minerals
- Architectural or surveying work
- Installing security systems
A full list of activities can be found here.
What steps can I take?
From a business perspective, check whether these changes will impact your cashflow. There are a few simple things you can do to ensure compliance with the new law:
- Update your accounting software to include the reverse charge.
- Make sure that any staff involved with accounting are familiar with the changes.
- Update your invoice template to make reference to the reverse charge, and leave a space to include the amount of VAT the customer should pay.
What happens if I get it wrong?
HMRC knows that these changes are confusing. It promised to apply a light touch for the first six months, but this grace period has now passed and failure to apply the reverse charge correctly may result in penalties.
The best way to avoid any trouble is to consult an expert. We have decades of experience with UK tax law, and we’re always happy to offer guidance. If you have any questions about the VAT reverse charge, or any other aspect of business accounting, don’t hesitate to get in touch.