What is the VAT reverse charge?
Introduced on the 1st of March 2021, the VAT reverse charge is used for most supplies of both building and construction services.
It basically means that any VAT registered contractor paying for these types of services – services that are covered by the Construction Industry Scheme (CIS) – will need to pay the owed VAT directly to HMRC instead of paying it to the contractor/subcontractor/supplier.
For more information on VAT and whether or not you need to register, read our What is VAT? page.
What is the Construction Industry Scheme?
CIS is a tax deduction scheme affecting self-employed workers contracting in the construction sector.
It was put in place to prevent fraud and tax evasion in the industry and also helps subcontractors by spreading out their tax liabilities throughout the financial year because the deductions count as advanced payments towards their tax and NI.
All contractors must register for CIS – if you pay subcontractors for construction work or you have spent more than £3m on construction in the 12 months since you made your first payment (even if you don’t have a business that carries out construction work), then you count as a contractor.
It’s not mandatory for a subcontractor to register for CIS, however, if they don’t then they will have 30% deducted from their payments as opposed to 20% if they were registered.
If you are a subcontractor and you’re also either a sole trader, the owner of a limited company or a partner in a partnership or trust, then you will have to register.
You can fall under both categories of contractor and subcontractor, in which case you’ll need to register as both.
For more information on CIS, read our Construction Industry Scheme page.
Who does the VAT reverse charge apply to?
As mentioned previously, the VAT reverse charge applies to VAT registered contractors who are either supplying or receiving construction services that are reported under CIS.
Examples of services whereby you must use the reverse charge include:
- Either constructing, altering, repairing, extending, demolishing or dismantling: buildings or structures, power lines, railways, pipelines and electronic communications equipment (the full list can be found on GOV.UK.).
- Installing things like heating, lighting, drainage, power supply and water mains in a building or structure.
- Internal cleaning of buildings and structures.
- Painting and decorating either the inside or the external surfaces of a building or structure.
If your business isn’t VAT registered then you need to ensure that the other party is aware of this.
It does not apply to ‘end users’ such as occupiers using the building that has been constructed, retailers and landlords.
There are certain services, that when supplied on their own, aren’t affected by the charge.
- Installing seating, blinds and shutters.
- Installing security systems.
- Either drilling for or extracting oil or natural gas.
- Manufacturing the components for things like heating, lighting and drainage (as well as delivering these to the site).
We hope this page has answered some of your questions on the VAT reverse charge for Construction. Our team of experts are available to answer any other queries you may have, so give us a call on 01442 795 100 or email firstname.lastname@example.org.