Construction Industry News - Reverse Charge Rules 2021

Reducing VAT Fraud

The purpose of the new reverse charges rules taking effect on the 1^st March 2021 is to reduce VAT fraud in the Construction Industry.

In other words, the risk of builders charging 5% or 20% VAT on sales invoices raised to their builder customers and being paid this VAT but not declaring it to HMRC on a VAT return, will end.

This is because builders will no longer charge VAT, and the customer will self-account for the VAT instead on their own returns by doing a reverse charge entry.

The Box 1 output tax entry made on the customer’s VAT return will be based on an instruction on the supplier’s sales invoice showing the amount of VAT to declare (£x), or at least the rate of tax (5% or 20%). The reverse charge rules will not apply to zero-rated supplies.

“BUILDERS WILL NO LONGER CHARGE VAT, AND THE CUSTOMER WILL SELF-ACCOUNT FOR THE VAT INSTEAD ON THEIR OWN RETURNS BY DOING A REVERSE CHARGE ENTRY.”

WHO WILL THE REVERSE CHARGE APPLY TO?

The reverse charge will only apply to work carried out for other builders, where the builder sells on the work in question as part of an onward supply. The reverse charge will not apply if the builder receiving services confirms they are either an end user or intermediary supplier.

The new rules do not apply to an employment business that provided labour rather than building services, usually on an hourly or daily rate basis.

Professional services are also excluded, such as architects, surveyors and project managers.

However, if you supply construction services, the reverse charge will only apply if you answer ‘yes’ to all of the following three questions:

Is the work in question subject to either 5% or 20% VAT, ie it is not zero-related?

Is your builder customer registered for both VAT and the CIS (Construction Industry Scheme)?

Does the work fall within the scope of the CIS, for example plumbing, bricklaying, electrical work carried out on a building etc?

The reverse charge will also apply to materials supplied by builders as part of their work, irrespective of whether they raise separate sales invoices for labour or goods.

ACTION PLAN AND CHECKLIST

Builders supplying construction services must confirm that their customers are registered for both CIS and VAT.

They can ask for sight of the customer’s VAT registration certificate issued by HMRC or by using HMRC’s VAT number check service here.

Builder’s must also adapt their accounting systems so that sales invoices do not charge 5% or 20% VAT if the reverse charge applies. The invoices must also include the required instruction for the customer to do a reverse charge calculation on their relevant VAT return.