Orignal Article: VAT reverse charge technical guide
If you are in to buying and selling of construction services this technical information guide about VAT reverse charge.
This guide will help the people who buy and sell services in the Construction Industry Scheme.
In this guide we call ‘Final Customers’ or ‘Consumers’ the end user for reverse charge purpose. These are business or groups of businesses who register for VAT and Construction Industry Scheme but do not make onward supplies of the building and construction services supplied to them.
End Users can inform their suppliers or building contractor in writing that they are the end users therefore the reverse charge does not apply to the supplies they purchase.
Under the VAT and Construction Industry Scheme, reverse charge does not apply to business registered as intermediary suppliers who buy construction services and re-supply, making no alterations before supplying to the end users. The policy also treats them as end users.
To provide services to the end user, the intermediary suppliers must either:
When intermediary suppliers notify to their suppliers or building contractors in writing that they are intermediary supplier reverse charge is not applicable. Intermediary suppliers can refer to themselves as end users.
The Design and Build Company buys services from multiple suppliers and provides them as one to the client, under the design and build contract.
For the intermediary suppliers, if they meet the conditions and do not make changes or processing of services, the customer should treat the design and build company will as an intermediary supplier of building and construction services. This includes supplies such as scaffolding, which are important to design and build.
Normal VAT rules apply to the design and build company for being directly connected to the client. One cannot refer to the design and build company as an intermediary supplier if they have no connection with the client directly. Therefore, the reverse charge will apply to the construction services bought in for onward supply.
They can share notification of end users or intermediary status by:
The written notifications are to be kept as business records and should clearly state what supplies the intermediary supplier covers in the notification. The intermediary supplier can specify supplies under the contact or it can be a Heads of Agreement or call-off type contract for supplies that are to be made in the future.
When the end user or intermediary supplier notification becomes a part of the contract issued by the supplier, the notification becomes valid as long as the customer has given written agreement to the contract.
If a customer changes form, from an end user to an intermediary supplier or intermediary supplier to an end user, there no need of re-issue of notification.
The customer will be liable for accounting for the VAT if the written notification is not as per specification. The person making the notification should know the correct format. A sample of which is given below:
‘We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.’
In order to qualify as an end user or intermediary supplier, the customer must issue a written notification to their supplier or contractor to avoid reverse charge. If the customer does not submit a written notification, the supplier must assume that the reverse charge applies and will not charge VAT to the customer.
Normal VAT should apply, where sales operations or networks are targeting the domestic consumer sales. It’s not mandatory to check the VAT, CIS or end user status of the customer.
If the customer is an end user or not, to clear any doubts one should always ask the customer whether they’re registered for VAT and CIS.
If a company deals with end users or intermediary suppliers frequently, they should include a statement in their terms and conditions that they will assume that the customer is an end user or intermediary supplier unless they say they’re not. This shifts the responsibility on the customer to respond if this not the case.
The purpose of the reverse charge is different for employment businesses. Reverse charge is not applicable to the supplies supplied by the employment businesses. Even if those supplies fall under CIS scope.
Supplying construction workers does not fall under building and construction services, supplying staff is subject to VAT.
The employer supplies the workers, this activity is subject to VAT. The employment business can provide the supply of the workers to the other individuals for VAT purposes are:
Joint venture projects can have very similar situation where the customer makes payments to each company separately. The customer pays employment business for their staff not for the construction services therefor they will be no reverse charge.
The labour only sub-contractors are subject to reverse charge. They are only responsible for the work carried out, therefore the reverse charge applies to them. This applies if follow are the services:
Supply of staff does not fall under reverse charge whereas labour only construction services fall under reverse charge. How to differentiate the supply is:
If the supplies meet all the conditions of the Construction Industry Scheme Scope, the supplies by the by labour only sub-contractors are subject to the reverse charge.
Even If the supplies meet all the conditions of the Construction Industry Scheme Scope, but the employment business supplies them, they are not subject to the reverse charge.
One should treat the supplying business as an employment business, under the following conditions:
One should treat the supplying business as a labour only sub-contractor, under the following conditions:
VAT is not applicable to such invoices, reverse charge applies to these services supplied by the business.
There may be difficulties when implementing reverse charge and HMRC completely understands that. They will deal with errors with light touch that made in the first six months of the new legislation. As long as one is trying to comply with the new legislation and have good faith.
Recovering or Correcting the errors can become difficult if the under declared or overcharged sums remain outstanding for a longer period. One should correct the errors as soon as they identify them.
If one is deliberately trying to take advantage of the measure by not accounting them correctly, the HMRC officer can impose penalties even during the light touch period.
Your business will make net repayment claims to HMRC because of the reverse charge due to you are no longer receiving VAT on your sales.
Through Online VAT account, one can move to monthly returns.
One should be aware as a sub-contractor that the customers will not be paying VAT anymore, which will reduce the gross value of the payments coming into their business. This will affect your day-to-day cash-flow, so one needs to consider this beforehand.
Reverse charge will apply to all services in a supply if one or more services are subject to reverse charge. Normal VAT will apply if the supply that falls under reverse charge is 5% or less of the total services supplied, if the customer makes an end user or intermediary supplier notification. They refer to this rule as the 5% Disregard.
The supply and fix works will be subject to the reverse charge because services and goods supplied together for VAT purposes. For instance, a business constructs a staircase offsite and installs onsite. They will call this as a reverse charge service even if the charges of installation are tiny based on the overall charge.
If both parties have already agreed or have already had a reverse charge service between them on the construction site, they both can also agree for additional construction supplies to be treated as reverse charge services.
There can be confusion about whether a type of work falls under the definition of building and construction services or not. As long as the recipient is VAT registered and the payments are subject to CIS, the reverse charge applies. You can also check the list of specified services.
Contracts will be subject to reverse charge where a customer enters into two separate contracts for works with same the supplier for the same site within the CSI Scope. For VAT purpose they comprise a single supply, this will also be subject to 5% disregard.
The reverse charge will apply on the full value of the order, when a customer places a single supply and fix order with the supplier within the CIS Scope, even if the supplier issues two separate invoices for the supplies and fix-elements by the supplier.
Reverse charge will also apply on both orders, if the customer places 2 different orders with the same supplier for supply and fix works within the CIS Scope i.e., one order for materials and second order for labour, and that too for the same site and work to be done at the same time.
If the customer orders spare after the completion of the supply and fix contract is completed:
There can be circumstances with the customers where the VAT treatment changes from normal VAT accounting to the reverse charge or vice versa.
When this situation arises, it is the duty of the customer to notify the supplier for him to use the correct VAT treatment.
The new treatment will apply at the point the customer’s circumstances changed.
If the change in circumstances happens during the invoice period, where there would be one invoice, including both reverse charge and normal VAT rules. The supplier has the choice to decide on the new treatment for the entire invoice period or wait until the next invoice period before making a change.
VAT becomes payable, at the time of issue of VAT Invoice or when you receive payment, whichever is earlier.
For invoices that are issued for the specified supplies that become liable for reverse charge, the VAT treatment for the invoice with a tax point:
For authenticated tax receipts or self-billed invoices, the tax point is normally the date the supplier receives payment.
The transitional arrangements for how to determine the VAT treatment for payments due on any supplies entered into your accounting system is if the date entered is:
Under the reverse charge, the supplier must not enter any output tax on sales. The supplier only needs to enter the net value of the sale.
You must enter the VAT charged as the output tax on your VAT returns, if the services you buy are subject to the reverse charge. Please ensure you do not enter the net value of the purchase as a net sale.
With the Normal VAT rules, you may reclaim the input tax on your reverse charge purchases.
The supplies of services that are subject to the reverse charge, one cannot use the VAT Cash Accounting Scheme
When the supply fall under the reverse charge, no VAT will be due on payment from the customer in the case of sales.
When you receive a payment, just include the value of the sale in your VAT return.
For the supply services that are not subject to the reverse charge, for example, to private individuals or end users, you must account for VAT on the dates you receive the payment.
In your VAT Returns you will have to account for the services you receive from the sub-contractors if the services are subject to the reverse charge and recover it on the same VAT Return. These are the rules based on normal VAT input tax deduction.
The date you make your payment to the sub-contractor is the date they account you for, unless the supplier issues you a tax invoice beforehand. In that case, use the issue date of the invoice for the account of VAT.
You should not account for the reverse charge supplies under the flat rate scheme. Users who receive the reverse charge supplies will have to account for the VAT as per HMRC and recover on the same VAT Return.
Users of the Flat Rate Scheme cannot recover VAT incurred on purchases of materials, overheads and so on. They will have to consider whether it will be beneficial to them.
Where the domestic reverse charge applies to supplying a service, the supplier must:
The invoices that are subject to reverse charge must include the reference ‘reverse charge’ under the VAT Regulations 1995. Some of the wording that fulfil the legal requirements are below:
Sample Invoice (Downloadable PDF File)
Because of the limitation of your accounting software, if you cannot show the VAT Amount to account for the reverse charge, you must:
The customers who can reclaim all the tax on their supply as input tax and the supplier allows them a credit, there is no need to adjust the original VAT charge as long as both the parties agree not to do so. Under these conditions, this concession can also apply to the reverse charge supplies.
Else they should make the following adjustments:
The supplier will issue a credit note to the customer, where it states that the reverse charge applies along with showing the reduction in the VAT, which the customer has to pay to HMRC.
Below are some examples one can use in their credit notes:
The VAT Return should include the reduction in the value of the supply, for the period in which they have issued the credit note.
The customer needs to adjust the amount of the output VAT due (as per the supplier’s credit note) by subtracting the total VAT due in the VAT Return of that period similar to the issue period of the credit note.
Adjust of the amount of the input VAT in the same VAT Return according to any input tax adjustment calculations that may apply (for example partial exemption methods).
The VAT returns must include the reduction in the value of the supply, similar to the issue period of the credit note.
Under the self-billing or authenticated receipts system for the original supply, it will be the customer instead of the supplier to issue the credit, but all other procedures will remain the same.
Before the close of your accounting period, if you identify a change in value of the reverse charge services, you can adjust your primary records of the sales and purchases to ensure that you provide correct figures in your VAT account.
On 1st March 2021, with the introduction of the reverse charge, when a supplier issues a credit note to reduce the value of, or cancel, an invoice issued before 1st March 2021. The following VAT procedures scenarios set out will apply:
Scenario 1
If a sales invoice is issued before 1st March 2021 with 20% VAT and a credit note is issued on or after 1st March 2021 to reduce the value of the supply, then if:
Scenario 2
Where a sales invoice is issued before 1st March 2021 with 20% VAT, a credit note is issued on or after 1st March 2021 for the full value of the invoice and a new invoice issued for the amount now chargeable. The credit note should then be issued with 20% VAT (normal VAT accounting procedure) and the new invoice should be subject to the reverse charge.
In the building and construction services, standard rated items are not subject to reverse charge, which are part of zero-rated supply. For example, the supply and incorporation of ovens and hobs.
For new build housing, if you supply only standard rated services, the reverse charge will apply. If the customer is an end user, the reverse charge will not apply and you should use the normal VAT rules.
For more information see VAT Notice 708 (buildings and construction)
In the new build housing, the standard rate of VAT is due on the value of goods not ordinarily incorporated.
You should charge standard rate VAT, when you supply and install these goods in a new build housing. The reverse charge is not applicable here.
Hire, erection and dismantling of scaffolding contract is part of the CIS Scope. In the scaffold supplier’s invoice, if he shows separate charges for the hire of scaffold and the cost of the labour to erect and dismantle it:
The full value of the supply will be subject to the reverse charge, if the scaffold supplier’s invoice shows a single charge for the hire of scaffold and labour, unless the customer is an end user.
Reverse charge will apply on the hire, erection and dismantling of scaffolding on developments other than new build housing, if it meets all other conditions.
The supply of operated plant or machinery used on new build housing developments is zero-rated therefore, the reverse charge does not apply.
A reduced rate of VAT may apply on building and construction services, if the:
The reverse charge applies with the standard rate of VAT on the supply and fix of goods not ordinarily incorporated in residential conversions and refurbishments. Normal VAT Rules apply if the customer is an end user.
The hire of goods only is not part of CIS Scope therefore, the reverse charge does not apply to the hire charge.
Provision of construction services to the utility businesses is likely to be outside the scope of the reverse charge because of the construction, repair or alteration of the utility company’s physical assets. Although they are CIS Registered but the end user exclusion will apply.
The domestic reverse charge does not apply on the following services provided by utility businesses:
Exceptions to this will be when a utility company takes on the role of contractor for particular projects, such as:
Utility companies may meet their Energy Company Obligation funding obligations by:
For VAT purposes, the company only makes a supply for payment and reverse charge will apply as well, if the supplies are part of CIS Scope and meeting other conditions.
Utility companies are defined as:
The end user terminology does not apply to supply to public bodies.
Most supplies will either be:
If the public body is providing services commercially and selling the construction services, one cannot treat them as an end user. The supplies provided to the public body will be subject to reverse charge and they will have to account for the VAT to HMRC. The public body will also have to establish the status of its customer as the end user.
The Developers may provide many other types goods and services for a nominal or no charge to the local authorities or other authorities under the section 106 of the Town and Country Planning Act 1990 or similar agreements.
We can also describe these agreements as planning gain agreements.
VAT is not chargeable on any provision of such goods and services by the developer, who is following a planning gain agreement and it is not a supply for consideration. The developer is not making onward supplies of construction services under the agreement and he can opt to be an end user for reverse charge purposes, if they meet the end user conditions.
One form of Public Private Partnership (PPP) is Private Finance Initiative (PFI). For the provision of public sector infrastructure and services, the public and private sectors take initiatives to work closely together with the private capital and expertise. These PFI and PPP agreements between the public body and private company are for long term, usually 20 to 30 years.
Upon the request of the public body, the private company provides a fully maintained asset in return for payment of a unitary charge depending on the availability or provides ad-hoc services under the PFI and PPP agreement.
Under the PFI and PPP agreement, the unitary charge payments that the public body makes, one cannot treat them as payments for a supply of building and construction services. The private company is not supplying building and construction services to the public body therefore, they become the end user of the services for the purpose of the reverse charge. Normal VAT rules and with appropriate rate will apply to the all the supplies of specified services to the private company.
For the supply of ad-hoc services, if the public body and the private company have a separate agreement or contract between them, the reverse charge will:
A private company takes an interest in land, constructs buildings on the site and then leases the completed buildings back to the landowner. We call these agreements as sale and leaseback arrangements. For the purpose of the reverse charge, the end user here will be the private company. The supplies of specified building and construction services to the private company will be subject to normal VAT rules.
The exemption of the intermediary supplier applies to supplies of building and construction services, which they provide to an entity that is not an end user but is ‘connected’ with the end user. The end user here has a relevant interest in land and part of the venture.
Connected’ means that one party must be a ‘group undertaking’ of the other party, as defined in section 1161 of the Companies Act 2006.
People ‘connected’ to them have a relevant interest in land can be landlords, lessors, licensors, tenants, lessees or licensees. Having an agreement for lease is also a relevant interest in land. However, temporary rights to occupy land solely to carry out building and construction services, they will not consider for having a relevant interest in land.
In section 1161 of the Companies Act 2006, there are different joint ventures types, you need to define the right type of the joint venture, also ensure whether the joint venture can be a connected party.
To create a business venture or to achieve a common goal, the parties of the unincorporated joint venture or JANEs make unique contributions through their own existing structures. They defined the rights and obligations of each party, including third parties, under an agreement. The joint venture arrangement allows the profit and losses to flow directly to the parties.
For the reverse charge purpose, the unincorporated joint ventures or JANEs do not meet the conditions of an ‘undertaking’ or ‘group undertaking’ in section 1161 of the Companies Act 2006 and so cannot be a connected party to an end user, there can be exception if the joint venture gives rise to a general partnership under the Partnership Act 1890.
The end user definition may apply to an unincorporated joint venture or JANE. For example, for VAT purpose, treating the co-owners of land as a single person.
A private limited liability company or a company limited by guarantee, we call them a company or a corporation.
As per the conditions set in section 1161 of the Companies Act 2006, a company or corporation can be an end user or connected with an end user for the purpose of intermediary supplier exception. That is, if they meet all the conditions.
An LLP is a body corporate with legal personality separate from that of its members. If they meet the conditions set in section 1161 of the Companies Act 2006, they can be an end user or connected with an end user for the purposes of the intermediary supplier exception.
It can be a limited partnership if one or more:
Partnership business does not allow limited partners to take part in the management or running of the business. Only general partners make supplies for VAT purposes. An individual or a body corporate can be a general partner.
As per the conditions that set in the section 1161 of the Companies Act 2006, a general partner that is a body corporate can be an end user or connected with an end user for the purposes of the intermediary supplier exception, if they meet all the conditions.
When there are 2 or more general partners, for VAT purpose we treat them as a general partnership. It can be an end user or connected with an end user for the purposes of the intermediary supplier exception, if it meets the conditions of section 1161 of the Companies Act 2006.
‘The relation which subsists between persons carrying on a business in common with a view to profit’ is the definition of partnership, it comprises 2 or more persons.
As per the conditions of section 1161 of the Companies Act 2006, a general partnership can be an end user or connected for the purposes of the intermediary supplier exception, if it fulfils the conditions.
We can define a non-established taxable person as:
In UK, if a non-established taxable person makes any taxable supplies, they must:
If a person belonging in the UK and registered for UK VAT takes supplies of construction services for a non-established taxable person, it is the duty of the customer who must account for the VAT. We refer to this as the reverse charge for supplies received from outside the UK.
Normal VAT rules will apply if the customer is not VAT registered in the UK.
The domestic reverse charge will apply if the customer is registered for UK VAT and the supply falls within CIS Scope.
Reverse charge will not apply if the NETP is registered for UK VAT and fulfils the conditions to be an end user or intermediary supplier. NETP has to notify the UK supplier about its status of an end user or intermediary supplier in writing.
Reverse charge will apply if the NETP is registered for UK VAT and is not an end user or intermediary supplier. The NETP will have to account for VAT on the UK VAT return.
Use of this flowchart will help you decide if you need to use the reverse charge. You will need to use reverse charge when:
Flowchart for Suppliers (Downloadable PDF File)
Use this flowchart to help you decide if you need to use the reverse charge. The reverse charge will need to be used when:
Flowchart for Buyers (Downloadable PDF File)