VAT on construction

Sales may attract a sales tax, in the UK we call this tax VAT.

Works, in a variety of locations and for a variety of customers can attract a number of different sales tax rates, including exempt, zero rated, partial or lower rated, to or a standard rating. HMRC expects every business to know which rate is applicable to them and if  necessary, to prove the rate charged to their customers is correct.

It is important that if there is any doubt as to the correct rate then HMRC’s guidance must be sought and reliance on any direction must only be made on written evidence

• VAT, at zero rate, is charged on the construction of new buildings, provided the supply is for a social purpose e.g. new houses, dwellings and buildings with a charitable status.
• Zero rate, is also charged on ‘approved’ alteration work on “protected buildings”. Approval in this context refers to its VAT status not on some Planning or Building Regulations application. Alteration, in this context, means that a building’s fabric (walls, internal surfaces, floors, stairs, windows, doors, plumbing and wiring) is changed in a meaningful way.
• VAT, at the reduced rate, is charged on work which alters an empty residential building where a change of use is envisioned.
• VAT, at the standard rate, is charged on repair or maintenance work of any “protected building” and on all other construction work.

VAT is a very complex area of law and specialist advice may be required where works are being considered which do not clearly fall into a specific category.

The following is given by way of example: The shell of a building (structure and cladding) used in new construction is considered, for VAT purposes, as ‘alteration works’ if at least two walls are retained. ‘Granny annexes’ when sold as part of a dwelling are not to be treated as a separate commodity. A new build annexe to a charitable building would be treated as zero-rated if it has an independent means of access and it could function independently of the original building. Knowledge of these stipulations may may be valuable when tendering a design and build project.

HMRC’s website has guidance under ‘Buildings and Construction’ or try the www.nibusinessinfo.co.uk which also has useful information.

VAT Reverse Charging – What you need to know

Certain sales invoices will be subject to new VAT provisions. VAT Reverse Charging will apply to the following contracts.

• Those where the participants are subject to CIS.
• Those where the end-user (Employer) is retaining the built asset for their own use.
• Those where ‘sales’ comprise labour, material and/or plant.
• Those that may include an element of excluded sales but where those excluded items form part of the whole.

HMRC has produced an introductory webinar, which ECA recommends Members watch the first 30 minutes of, as well as downloading the following flow-chart: 

• HMRC’s Flowchart – to determine whether VAT reverse charging applies and the elements of the process that need managing.

Contracting Members who are employed on a self-billing basis will have the reverse charging applied to their applications. The methodology as to how to mange outgoing and incoming invoices is illustrated below:-

• Appendix 3 – Flow Chart – issuing a correct invoice.
• Appendix 4 – Flow Chart – checking an Incoming Invoice.

VAT Reverse Charging will NOT apply to the following sales / contracts:

• Sales entirely consistent of supply-only assets.

• Sales entirely comprising of the installation of security systems (burglar alarm) closed circuit television and public address systems.

HMRC's approach to mixed supplies: 

The legislation is designed so if there is a reverse charging ‘element’, in a supply, then the whole supply will be subject to Reverse Charging. A significant amount of communication will be required.

If in doubt, provided the recipient is VAT registered, and the payments are subject to CIS, it is recommended that the reverse charge should apply.

Overview

The Construction Industry Scheme (CIS) sets out the rules for how payments to subcontractors for construction work must be handled by contractors in the construction industry and excellent information is available from the HMRC website. 

The tax authorities provide the industry with a number of online support services For a full introduction to how CIS may affect you, please visit the HMRC website. 

HMRC provide a guide to CIS for Contractors and Subcontractors (Re: CIS 340). 

While considering Tax Status, it is important to check the employment status of your subcontractors. You can do this by completing the online status indicator (ESI) found on the HMRC website. 

HMRC Announcement - 12 November 2020

Contractors employed in Construction work must register with CIS. The CIS Scheme covers most construction work and contractors who pay subcontractors must be registered.
 
As of 6 April 2021 the CIS Scheme changed, as follows:

• CIS Set Off Amendment Power
• Cost of Materials
• Deemed Contractors
• CIS Registration Penalty

In brief this means, that from the 6 April 2021:

• Where HMRC is dissatisfied with the evidence provided to support a set off claim by an employer against his liabilities, then HMRC will amend the CIS deduction figure on the EPS.
• Only materials directly bought for that specific contract will be allowable as a reduction in the gross payment in order to determine the tax liability.
• The time periods currently set to review whether a non-construction business whose spend on construction exceeds the £1m average threshold must shorten and a review of their tax position must occur on a more regular basis.
• The scope for HMRC to inflict financial penalties to any person deemed influential in the decisions as to how to declare CIS liabilities is being widened.

HMRC’s explanation and summary of these changes can be found on the HMRC’s website search: Changes to tackle Construction Industry Scheme abuse.

Optional Insurances

All businesses require insurance to comply with their statutory requirements, meet their contractual obligations and help manage the risks to which they are exposed. And with Building Services Contractors undertaking an increasingly diverse and complex range of activity, having the right cover for your business is vital.  

How ECA can help

Founded in 1976 to insure ECA Members, Markel provides specialist liability and property insurance for electrical and mechanical building services engineers and contractors. Over 90% of the business written by ECIC is from independent insurance intermediaries appointed to find the best combination of service, price and cover for their clients.

For more information about Markel’s specialist products and services, ask your insurance broker to contact Markel or visit uk.markel.com.