VAT reverse charge for building and construction from October


New rules come into force in October for VAT-registered firms reporting under the Construction Industry Scheme (CIS) as part of HMRC’s attempt to tackle fraud in the industry.

Fraudsters who set up companies in order to siphon off VAT and then close within months before paying anything to HMRC, have started operating in the construction industry. As measures have been taken in other sectors to close them down, the fraudsters have sought out other industries to exploit.

The domestic reverse charge (meaning UK-only) will be introduced from 1 October and means that businesses receiving certain services will have to pay VAT directly to HMRC instead of the supplier of those services. This removes the flow of money from VAT between businesses, with the onus on the recipient of services to account for the VAT.

Those affected include sole traders and individuals working as contractors, or sub-contractors to larger contractors, or through agencies. CIS registered companies and companies invoicing non-CIS registered clients will continue to charge VAT as usual.

The charge applies only to supplies subject to standard or reduced rate VAT, not to zero-rated supplies or suppliers below the VAT threshold. VAT accounted for under the charge will not count towards the VAT registration limit for the recipient.

The specific services targeted include:

  • installations of systems such as heating, air-conditioning, power, drainage, sanitation etc.
  • internal or external painting and decorating
  • construction, demolition, repair or alteration of any structures.

Excluded from the reverse charge are professional work from surveyors and architects, machinery delivery or installation of security systems.

Any contracts that are only partially completed by the October start date will have to be reviewed to assess whether the new charge needs to be applied to unfinished elements of a project. Subcontractors will need to plan for cashflow implications as previous, perfectly legitimate, uses of VAT around cashflow will disappear.

HMRC has said that it will apply a ‘light touch’ on any penalties for the first six months to allow firms to transition to the new regulations. If businesses are seen to be trying to comply with the new rules, and correct any errors as soon as possible, they should avoid being penalised.