Insights

The VAT Domestic Reverse Charge (VDRC) rules come into effect on 1 October 2020 and will mean a complete change to the way the construction industry currently operates and pays VAT. If you work in the property or construction trades, or if you employ tradespeople for services, here’s what you need to know.

Note: This legislation was due to be implemented in October 2019 and has now been postponed to October 2020. Although it's now a year away, it is well worth being aware of what is coming to make adjustments as necessary.

What is the VAT Domestic Reverse Charge ?

HMRC have long argued that VAT underpayment in the construction industry is widespread, with many individuals and companies looking for ways to avoid paying the VAT charged on services they have delivered.

The VDRC is designed to prevent this from happening by ensuring that VAT is not chargeable through the supply chain until the end customer.

Reverse Charge for Suppliers

Here are 6 aspects of the reverse charge for suppliers to consider:

1. It will apply to building and construction services which are supplied at the standard or reduced VAT rates;
2. It will need to be entered onto the VAT return for all suppliers who fall under the Construction Industry Scheme (CIS) and are not paid gross;
3. It will apply to the whole amount invoiced, unlike CIS which only relates to the labour element, the reverse charge will apply to materials and labour;
4. If any service included in a supply is subject to reverse charge, then the entire supply will fall under the reverse charge rules. This is the case even if elements of the supply wouldn’t fall under reverse charge rules if they were supplied on their own.
5. Unfortunately, the normal reverse charge code in accounting packages for the purchase of services from suppliers outside the UK may not be able to be used for this VDRC because the reporting requirements are slightly different.
6. There may well be cashflow implications for some sub-contractors working for the main contractor given they may not be receiving payments with VAT anymore.

All contractors are advised to review their contracts with sub-contractors, to decide whether the reverse charge applies to the services which they receive under the contracts.

Contractors should also notify their suppliers if services will fall under reverse charge rules, to ensure suppliers understand why they’re being paid NET rather than the gross amount.

Are there any exclusions to the Reverse Charge?

The reverse charge doesn’t apply if:

• The service is zero rated;
• The customer isn’t UK VAT registered;
• The service is supplied to end users or intermediaries connected with end users (see the following link for more info - https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#end-users-and-intermediary-supplier-businesses).

What types of services will require the Reverse Charge?

You will need to apply the reverse charge when supplying any of 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 either form an integral part of, or an element 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.

What services do not require the Reverse Charge?

The following services are not subject to the reverse charge:

• 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;
• 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.

HMRC to exercise leniency

HMRC has said they realise that the change to the VDRC might not happen overnight and they anticipate a few issues in the early days. They have pledged to employ a lenient approach for the first 6 months provided the business can show that they have tried to implement the VDRC.

To find out more, please review the guidelines issued by HMRC: VAT Domestic Reverse Charge Rules

If you have any questions about the forthcoming Domestic Reverse Charge rules and would like some support, please contact us by emailing partners@rjp.co.uk.