The new domestic VAT

Updated rules for the construction industry

The new domestic reverse charge will be a massive change and have a huge impact on the way VAT is collected and accounted for in the building and construction industry.

It came into effect on 1st March 2021. The customer receiving the affected construction services will have to account for and pay the VAT due to HMRC instead of the supplier.

This is a major change to the VAT construction process, but it will also increase the importance of a business’s existing construction industry scheme processes, and they must use the updated relevant accounting software.

The concept of a VAT domestic reverse charge between UK VAT registered businesses is indeed not new. This system was primarily introduced to counter the problem of missing trader VAT fraud in various sectors.

The new domestic reverse charge for building and construction services will result in the customer (ie the contractor, who is the business making payment for construction services) being now responsible for self-accounting for the VAT.

The reverse charge will broadly affect supplies of building and construction services which also need to be reported under the construction industry scheme in the UK, at the standard or reduced 5% VAT rates. For example, the construction of a commercial building qualifies for the reverse charge, being construction operations, whereas carpet fitting does not.

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