Hopefully you have read beyond the title because this relatively new legislation – Domestic VAT Reverse Charge for the construction industry – catches more people than you might imagine.
While many construction related businesses, like builders, plumbing etc appear obvious targets and are easy to spot, others are not. For example, businesses like IT, cleaning, alarms, television or painting & decorating.
We have recently seen a spate of clients in those peripheral industries being caught out by this new legislation.
In March 2021, the government introduced something called the Domestic VAT Reverse Charge for Construction Industry Scheme Services. The legislation provides a comprehensive list of the work that falls within this scheme but in summary, it includes alterations, repairs, decoration, construction, demolition and site preparation. It has no de-minimis limit and no specific reference to new build or other types of work so any of those work types are included.
Just to complicate matters, some work is specifically excluded from the scheme such as CCTV, architect, surveyor and interior design services (but not actual painting and decoration).
Adding insult to injury, the legislation then talks about mixed supplies – e.g. you instal CCTV and telephone wiring, one is exempt and one is not. It’s a majority rules scenario: if most of your work falls within the rules then all of it falls into the system.
Taking an IT or TV company for example, if they install cabling to a new building, on behalf of the builder, it will be treated as part of the construction. Cleaning a building during the course of construction also falls under the reverse charge system.
The main issue is that the builder decides if you are part of the construction industry supply and before you know it, they’re telling you to issue them with invoices excluding VAT and if you have used another business to undertake some of the work, you may have to do likewise.
Just to be clear, if you are doing work for “the end user” then the reverse charge does not apply to those services/supplies.
Where your customer is an “intermediary supplier” (where they are recharging your work to the end user) then the reverse charge system applies.
Under the Domestic Reverse Charge System, you do not add any VAT to your sales invoice. The customer will input your invoice on to their system and declare output vat and input vat so there is no cash impact, but HMRC know the value of these supplies.
Similarly, if you undertake work for an end user BUT use sub-contractors, they may need to issue invoices to you with no VAT on, so how do you account for such invoices on your software?
Software such as Xero or QuickBooks already have appropriate rates in place or the option to create one quite easily but if you need further assistance, please contact one of our team, who would be happy to help.
Photo by Christopher Burns on Unsplash