Originally due to come in to effect on 1st October 2019 its finally coming in to force on the 1st March 2021, HMRC understands that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.
The reverse charge means the customer receiving the specified service must pay the VAT to HMRC instead of the supplier. In turn, the customer can recover the VAT, subject to the normal rules for VAT recovery. This will affect you if you supply or receive specified services that are reported under the Construction Industry Scheme (CIS).
The reverse charge will affect supplies of building and construction services supplied at the standard or reduced rates that also need to be reported under CIS. These are called specified supplies.
There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the material content.
What do you need to do to be Ready?
- 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
Who is an End User and Does Reverse Charge Apply
For reverse charge purposes consumers and final customers are called end users. They’re businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but do not make onward supplies of the building and construction services supplied to them.
The reverse charge does not apply to supplies to end users where the end user tells their supplier or building contractor in writing that they’re an end user.
Intermediary suppliers are VAT and Construction Industry Scheme registered businesses that are connected or linked to end users
What contractors need to do
If you’re a contractor you’ll also need to review all your contracts with sub-contractors, to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.
What sub-contractors need to do
If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.
Reverse Charge does not apply to some services. These are those supplied to end users or intermediaries connected with end users.For reverse charge purposes consumers and final customers are called end users. They are businesses, or groups of businesses, that do not make onward supplies of the building and construction services in question, but they are registered for CIS as mainstream or deemed contractors because they carry out construction operations, or because the value of their purchases of building and construction services exceeds the threshold for CIS.
Employment businesses who supply staff and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge. The important distinction between supplying staff and supplying construction services is that the individual workers are employed or paid by the employment business and not by the construction business that uses them to provide construction services.
Employment businesses supplying construction workers
For VAT purposes such activities of workers are supplies of staff by their employer and not supplies by the workers themselves. Therefore, the supplier makes a supply of staff for VAT purposes if, for a consideration, it provides another person with the use of an individual who is:
- contractually employed or otherwise engaged by the employment business
- is a director of the employment business
Labour only sub-contractors
The reverse charge applies to services provided by labour-only sub-contractors. The labour only sub-contractor is responsible for the works carried out and therefore subject to the reverse charge. the clear distinction between labour-only sub-contractor and employment businesses are in labour only sub-contractor it will be the business supplying the labour that will be responsible for overseeing the completion of the work.
You will have to apply the reverse charge if you supply any of these 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
You must NOT use the reverse charge when supplied on its 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 artworks 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
Affect on Cashflow
implementation of the reverse charge will affect your cashflow. The business will make net payments to you ( without VAT) which will reduce the gross value of receipts from your customers. So you will need to consider and plan for the impact.
Other Important Points to Note
- If any of the services in a supply are subject to the reverse charge, all other services (even if that service would be excluded if it were being supplied as a single service) will also be subject to it.
- As a result of the reverse charge some businesses may find that, because they no longer pay the VAT on some of their sales to HMRC, they become repayment traders (their VAT Return is a net claim from HMRC instead of a net payment). Repayment traders can apply to move to monthly returns to speed up payments due from HMRC.
- if there has already been a reverse charge service between 2 parties on a construction site, and if both parties agree, any subsequent construction supplies on that site between the same parties can be treated as reverse charge services.
- If there is doubt whether a type of works falls within the definition of a specified service, as long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge should apply.
- To avoid uncertainty and delay to payments for businesses with large contracts at a variety of sites, whilst each contract is checked HMRC recognises that it will be easier if one VAT accounting treatment is given to all contracts with a sub-contractor.
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Written by Quraish Adamally