Domestic VAT Reverse Charge For Building And Construction Services

• Published date: 01 March 2021
• Subject Matter: Real Estate and Construction, Tax, Construction & Planning, Sales Taxes: VAT, GST
• Law Firm: Arthur Cox
• Author: Mr William Curry and Cahal Carvill

From 1st March 2021 the domestic VAT reverse charge (the "Reverse Charge") will be introduced in the UK. What impact will this have on the supplies of building and construction services?

The introduction of the Reverse Charge will have a significant impact on those that supply building and construction services. HM Revenue & Customs ("HMRC") have published guidance on the Reverse Charge to help businesses that will be affected prepare. The introduction of the Reverse Charge was previously delayed in 2019 due to concerns businesses were not prepared to deal with the change and a further delay in 2020 as a result of Covid-19. This note outlines the scope and effect of the Reverse Charge specifically for the building and construction services. If the Reverse Charge does not apply you should continue to follow the normal VAT rules.

What is the Reverse Charge?

The Reverse Charge is a mechanism to prevent the avoidance of VAT by suppliers who charge and collect VAT from the recipient but fail to account for the VAT to HMRC. The Reverse Charge changes the responsibility for accounting to HMRC for VAT from the supplier to the recipient of the supply. The recipient is now responsible for directly paying HMRC as opposed to paying the supplier.

What services are affected by the Reverse Charge?

In order to determine whether the Reverse Charge will apply to your services, the following conditions must be met. It must be a taxable person who supplies construction services which are not excluded. The recipient must be a taxable person at the time the supply is made, and the supply must be made in connection with the recipient's business. If the supplies are to a business that is not VAT registered or to customers for non-business use these are not caught by the Reverse Charge.

In addition, the supplies must be taxable at the standard or reduced rates. Zero-rated supplies of goods or services are outside the scope of the Reverse Charge. Supplies that are eligible for zero-rating are set out in Schedule 8 to VAT Act 1994 (the "1994 Act") including; the supply of any services (other than an architect, surveyor, or any person acting as a consultant or in a supervisory capacity) related to the construction of a building; and associated supplies of building materials incorporated into a building (or its site) during construction of a building either designed as a dwelling (or number of dwellings) or intended for use solely for a relevant residential purpose.

If the above...