What is VAT?
Value Added Tax (VAT) was born in 1973 and plays a large role in providing revenue for the government in the UK. It is a consumption tax that is added onto a product or service that increases in value at each stage of production or distribution.
What is VAT reverse charge?
VAT reverse charge means that customers are able to charge themselves VAT and pay it directly to HM Revenue and Customs (HMRC) rather than the supplier sending them an invoice at a later date, which in return stops suppliers from avoiding paying HMRC, also known as missing trader fraud.
Who does this affect?
VAT recharge is for businesses that provide services to other businesses which will then sell on to a consumer. It does not affect businesses who are providing a service directly to the consumer.
Which services are affected by the reverse charge?
This tax scheme affects businesses that provide specified services which are reported under the construction industry scheme (CIS) and will only qualifies for businesses or individuals registered for VAT in the UK. It will not apply if the service is rated zero for VAT. Third party recruitment businesses who supply workers and pay them to do a temporary job will not be affected by the reverse charge.
According to HMRC, the following services are affected:
- "Decorating or painting the inside or the exterior surfaces of any building or structure
- Site clearance, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works, earth-moving
- Constructing, repairing, altering, demolishing, extending or dismantling buildings or structures, including offshore installation services
- Reservoirs, pipelines, 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
- Altering, repairing, extending, demolishing, constructing of any works forming, or planned to form, part of the land, including walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours”
What services are not affected by the reverse VAT charge?
The following are the services that are not affected by the reverse charge:
- “Drilling for, or extracting, oil or natural gas
- Installing seating, blinds and shutters
- Installing security systems, including burglar alarms, closed circuit television and public address systems
- Making, installing and repairing art works such as murals, sculptures and other artistic items
- Signwriting and erecting, installing and repairing advertisements and signboards
- architectural or surveying work, or of building, engineering, interior or exterior decoration and landscape consultants
- Manufacturing components for lighting, air conditioning, ventilation, heating, power supply, drainage, sanitation, water supply or fire protection systems, or delivery any of these to site
- Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- Extracting minerals and tunnelling, boring or construction of underground works for this purpose”
What should you do now?
- Investigate if the reverse charge affects your sales or purchases
- Make sure you have the right construction accounting software in place so you have clear visibility of your financial data across all your construction projects.
- Analyse if the reverse charge will impact your cash flow
- Brief and/or update your employees who are liable for the VAT accounting operations so that they have knowledge on the reverse charge and the effects it may have.
- As a contractor you should review all your current contracts with subcontractors to ensure and check if the reverse charge applies to the services you receive. If it will, you need to let your suppliers know.
- As a subcontractor it is important that you inform your customers of the VAT recharge and obtain their confirmation of these changes where they apply.
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Article updated in March 2022.