26 January 2021: After several delays HMRC’s VAT domestic reverse charge for construction services is due to come into force on 1 March 2021. ICAEW’s Tax Faculty provides a reminder of the changes.

Originally due to come into force on 1 October 2019, the VAT reverse charge on construction and building services was postponed for a year and then later pushed back until 1 March 2021 due the impact of the coronavirus pandemic.

The anti-fraud measure represents a major change to the way that VAT is collected in the construction industry. It means that VAT-registered subcontractors performing qualifying “construction operations” will not charge the main contractor VAT for services rendered. Instead, the main contractor will pay the VAT over to HMRC on its behalf.

The change applies to standard and reduced-rated supplies of building and construction services made to VAT-registered businesses, who in turn also make onward supplies of those building and construction services. Landlords, property developers and tenants, are therefore exempt.

While the definition of “supplies” is closely aligned to the construction industry scheme (CIS), it does not include supplies of staff or workers.

In September 2020, VAT-registered construction business received a letter from HMRC advising them to check if they might be liable for the reverse charge.

ICAEW’s Tax Faculty advises business liable for the change need to have in place: 

• procedures to ensure that there is agreement between suppliers and customers over their status and the correct VAT accounting treatment;
• updated accounting systems to ensure that the correct invoicing procedures are adopted according to the rules in operation at the time of supply; and
• ways to manage the effect of the new rules on the business’s cashflow.

Ahead of the implementation of the charge, on 3 February, independent VAT expert Neil Warren is presenting a webinar for the Tax Faculty on the CIS VAT reverse charge and how it will affect clients. Find out more and register to attend.

Further support:

• Register for webinar: CIS VAT reverse charge at 12:00, 3 February (free for Tax Faculty and Faculties Online subscribers).
• HMRC guidance: “Check when you must use the VAT reverse charge for building and construction services”.
• TAXline August 2020: “Tax and the construction industry”.