The Construction Industry VAT reverse charge was brought in by HMRC as a way of removing the missing trader element of VAT which resulted in hundreds of millions of pounds of VAT money ‘going missing’ due to VAT being charged but not remitted to HMRC.
It was intended to be brought in from October 2019 but the combination of Brexit then COVID meant it finally came in from 01 March 2021. Many people are still confused by its operation and issues like who needs to report what to who. Simply put, this is for work with exemptions in the construction industry and the VAT only crystallises at the end of the chain, when the main contractor bills the client who then pays HMRC the remitted VAT on its VAT return. The intention of HMRC is that the VAT is then paid in one contractors VAT return.
There are a number of elements and conditions which need to be met in order to have the reverse charge take place. Are you affected by the Domestic Reverse Charge (DRC)? Will companies involved in the construction, alteration, repair, extension, painting and decorating, demolition of buildings, civil engineering and with the installation of heating, lighting and air-conditioning also be included? The rules are designed so that if there is a reverse charge element in a supply then the whole supply is subject to the domestic reverse charge.
The DRC applies except in the follow circumstances:
- A supply for VAT on construction services and materials is to an end user who could be a property owner
- Directly to a main contractor that sell or lets the newly built property
- The client is not VAT registered or required to be VAT registered
- The client is not registered for the CIS scheme
- The supplier or client is a landord and tenant or vice versa.
- The supplies are zero-rated
There is no specific published wording but it should be along the lines of:
- Reverse charge: VAT Act 1994 Section 55A applies
- Reverse charge: Customer to pay VAT to HMRC
The impact for clients in the Construction sector are mainly about the robust accounting systems they must have in place and continue to check over time. The VAT amount must still be shown on invoices under DRC, and with this there is the risk of error and customer recover the VAT when they should do.
If you feel you need further guidance get in contact with our vat team by emailing accounts@callan-group.com. Find out more about our VAT Return service and get in touch if you would like to know how we could help your business.
