VAT reverse charge for construction: Everything you need to know

Sunday, May 28th, 2023

Article By: Ben Roberts

VAT reverse charges can be a tricky idea to understand. It’s not easy to know when you need to use it, how you invoice it, as well as which services can be VAT reverse charged – let alone remembering any of that! This article (hopefully!) shines a light on this complex topic…

What is VAT reverse charge?

Tax is complicated (shock horror!) and sometimes you can charge the VAT to the business you’re trading with – that’s called a VAT reverse charge. Here’s an example:

So you’ve used the services of a sub-contractor, the job is complete and they invoice you. If the invoice states ‘VAT reverse charge rules apply’, what does that mean for you? It only means something if you’re VAT-registered yourself. And if you are, then it is your responsibility to pay the VAT directly to HMRC. And it works the other way too. You could be working for a larger contractor and if you’re VAT-registered you can state that they are to pay the VAT as per the VAT reverse charge rule.

VAT reverse charge for construction – HOW TO INVOICE?

  • When a VAT reverse charge is needed, the receiver of the goods or service declares it on both their purchase (input VAT) and on the supplier’s sale (output VAT) in their VAT return.
  • This means that the two entries cancel each other from a cash payment perspective.
  • The requirements for the supplier and the customer in a reverse charge transaction can be split like this: 
    • Supplier: Issues an invoice without VAT. This invoice will often require something to be added, such the customer’s VAT number and a note indicating that “reverse charge” applies.
    • Customer: Receives an in invoice without VAT. However, at the time of preparing their VAT return, the customer will manually calculate the VAT amount and report it as due and as deductible (both) in their VAT return.

Top tip: If a VAT reverse charge applies then you should issue an invoice without VAT and your customer will self-assess the VAT amount.

What services can be VAT reverse charged?

  • Decorating and painting the surfaces inside or outside of any building.
  • Site clearance, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways.
  • Constructing, repairing, altering, demolishing, extending or dismantling buildings or structures.
  • Installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure.
  • Reservoirs, pipelines, water mains, wells, sewers, industrial plant and installations for purposes of land drainage.

 

What services CAN’T be VAT reverse charged?

  • Installing seating, blinds and shutters.
  • Installing security systems, including burglar alarms, CCTV and public address systems.
  • Manufacturing components for lighting, air conditioning, ventilation, heating, power supply, drainage, sanitation, water supply or fire protection systems, or delivery any of these to site.
  • Manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site.
  • Drilling for (or extracting) oil or natural gas.
  • Making, installing and repairing art works such as murals, sculptures and other artistic items.
  • Signwriting and erecting, installing and repairing advertisements and signs.
  • Architectural or surveying work.

Top tip: On your invoice, make sure you specify that reverse charge rules apply.

 

VAT reverse charge for construction – OTHER THINGS TO KNOW

You can use a VAT reverse charge for construction if you:

  • Buy services from a business based outside the UK, such as Google or Facebook (as they are based in Ireland).
  • Buy goods from outside the UK (this is also known as postponed accounting).
  • Buy and sell services that are reported under the Construction Industry Scheme (CIS). Under the CIS scheme, contractors who buy from subcontractors must account for the VAT.

 

Clearly, there’s a lot of different parts to VAT reverse charges! Essentially, the main things to remember are:

  • The invoice issued by the supplier of the service doesn’t include the VAT, whereas the customer declares the VAT to HMRC themselves.
  • If you’re the supplier, make sure you specify that “VAT reverse charge rules apply” on your invoice.
  • You can use a VAT reverse charge for construction if you buy services from a business based outside the UK.
  • There are certain things which can VAT reverse charged, and other which can’t – see the lists above.

 

Don’t forget that our financial partners Comera Professional are always available to help! As a multi-disciplinary services business, Comera can assist you with a wide range of financial matters. HBXL’s customers can access a FREE one-hour financial advice session with Comera to get guidance and assistance with anything, no matter how big or small! It’s quick and simple to sign up, and highly recommended! Just follow this link to request a chat with the guys at Comera.

Of course, HBXL are just a phone call away if you’d like help with the cost of any of your building projects, whether you’re VAT registered or not. Simply give us a call on 0117 916 7898 and we’ll be happy to talk through your options today.