The VAT reverse charge is now in effect across the UK, and represents a huge change for the way the construction industry operates.
Originally scheduled to come into effect on 1 October 2019 and again in October 2020, its introduction on 1 March 2021 could result in up to 150,000 businesses being affected.
Self builders are zero-rated for VAT, so the new rules don't immediately impact custom and self build projects, but it is important to understand the reverse charge and how it could affect work on your site.
The reverse charge could affect subcontractors which are renovating a house, but it ultimately will not affect homeowners undertaking the renovation.
What is the VAT Reverse Charge?
From 1 March, the VAT reverse charge will affect anyone involved in the construction chain, who must bill VAT on their supplies to HMRC.
Currently, subcontractors have accounted for VAT on certain construction services, and deducted VAT on supply as an input. Instead, now only the business at the top of the supply chain will charge VAT to the customer, or end user.
This will restrict the cash flow flowing through small building companies, and it also means that builders need to be ready to deal with the change, by ensuring both accounting systems and practical processes are in place to meet the changes.
Designed as an anti-fraud measure, HMRC says the additional amendment is designed to make sure both parties are clear whether the supplier is excluded from the reverse charge.
Will it Affect Self Builders?
Self built homes are exempted. Under the HMRC’s DIY Housebuilders Scheme, self builders can reclaim VAT from HMRC that they had paid out as long as they are:
- Building a new house
- Converting a building into a new dwelling
- Bringing an existing dwelling back in to use that has not been lived in for 10 years
It is, however, worth being aware that construction work on a self build could have a knock-on effect for self builders working with small housebuilders.
This is because the direction of the cash flow could change, and subcontractors adapting to the new rules could be facing administrative challenges. This could potentially lead to delays.
When drawing up your contracts with builders, make sure you understand how the reverse charge will work within your project to minimise any disruption.
(MORE: VAT on a New Build: Can I Reclaim?)
Will it Affect Renovations?
Subcontractors will be affected by the VAT reverse charge if they are working on any of the following renovation or maintenance projects:
- Painting or decorating the internal or external surfaces of any building or structure
- Site clearance
- Earth-moving
- Excavation
- Tunnelling and boring
- Laying of foundations
- Erection of scaffolding
- Site restoration
- Landscaping and the provision of roadways and other access works
The full list of building and construction services affected by the reverse charge can be found on the government's website.
There are Exceptions
The professional services of design consultants (such as the work of architects, engineers and surveyors) will not be subject to the reverse charge when supplied on their own.
Additionally, builders and connected parties within a supply chain will be exempt from the reverse charge providing the customer provides written confirmation that they are an end user.
Campaigners Have Fought Against it
The Federation of Master Builders (FMB) has warned that the new policy will cut cash flow by around 20% for its members, and had called on chancellor Rishi Sunak to scrap it amid fears it could lead to a cash flow crisis within the construction industry.
And in February, the Construction Leadership Council sent a letter to the chancellor calling for a withdrawal of the VAT reverse charge to be announced in the Spring Budget on 3 March.
The CLC warned that the pandemic and impact of Brexit have already caused financial hardship within the industry, and that the new policy will cause further economic disruption.
In the letter, Andy Mitchell, chairman of the CLC, wrote: “The implementation of reverse charge VAT in April will restrict cash flow in our industry, especially to the smallest firms, at an extremely critical financial period for many businesses.
“This policy risks reversing any recovery industry has made from Covid-19 and will limit the scope for protecting and creating jobs across the UK.”
