What the VAT reverse charge means for landlords

Oct 12, 2020

Let’s say it right upfront: if you’re a landlord, it’s very unlikely the incoming domestic reverse VAT charge for building and construction will be a problem for you.

So why is the UK Landlord Tax team talking about it? Because, like any big tax change, it’s got people worried.

We’ve spoken to clients who are anxious it might affect them and, at face value, you can see why there might be some confusion.

The new policy, due to come into effect from March 2021, after being delayed twice, is aimed at preventing VAT fraud in the construction industry – and if you own rental property in the UK, the chances are you’ve spent your fair share of time dealing with builders and tradespeople.

For once, though, HMRC has been pretty clear in stating this doesn’t apply to ‘end users’ of construction services, including landlords and tenants.

That’s because it’s really about managing dealings between construction firms and their subcontractors.

Having said that, there will be a handful of businesses which blur the lines between construction and property rental.

If, like some of our clients, you both build properties (are a developer) and let them (are an ‘end user’), you’ll need to be aware of your responsibilities under the new regime.

Even if you are exempt as a straightforward ‘end-user’ landlord with one or two rental flats or houses, you’ll have to make sure you formally notify the supplier of construction services of that fact. That’s a new addition to the scheme introduced quietly in the summer of 2020.

What is the reverse charge?

The domestic reverse VAT charge is a major change in how VAT is collected in the construction industry, putting the onus on a customer who receives a service to pay any VAT due directly to HMRC, instead of to the supplier.

It’s intended to stop suppliers charging their customers for VAT but pocketing the money – apparently a serious concern for HMRC.

It’s a classic case of a new fiddle emerging as an older one – cash-in-hand income tax fraud – was effectively shut down, in this case by the introduction of the Construction Industry Scheme (CIS).

The reverse charge applies to specific services including:

  • building, alterations, repairs, extensions and demolitions
  • installing heating, lighting, air-conditioning and drainage
  • painting and decorating
  • site clearance, earth-moving, foundation-laying, scaffolding and landscaping.

Why do they keep delaying it?

Between Brexit and COVID-19, it’s been a chaotic couple of years in public administration and policy.

The reverse charge was originally set to kick in back in October 2019 and we accountants spent months getting our heads round it and preparing our clients.

Then, at the last minute, it was put on hold until October 2020 to give businesses time to prepare for the UK to exit the European Union.

Earlier this year, as the coronavirus became everyone’s primary concern, the Government hoofed it even further down the road – to March 2021.

The argument was the same: businesses already dealing with massive challenges didn’t need to be fiddling about trying to update their systems and processes to adapt to this change.

It could wait.

The logic is sound but there’s no denying that this in itself has created uncertainty and frustration.

Flowchart explaining the reverse charge.

A flowchart explaining the reverse charge. As you can see the reverse charges applies only to a very small minority of landlords, so you can probably relax.

What you need to do

If yours is a VAT-registered and CIS-registered construction business as well as engaging in property rental, you’ll need to:

  • Check if the reverse charge affects your sales and/or purchases.
  • Get your accounting software set up to deal with the reverse charge.
  • Consider the impact of the change on your cashflow – you might have less money than usual sitting in your accounts at various points.
  • Make sure your accounts are being handled by someone who knows how to process the reverse charge.

If you’re someone letting a domestic property and you’re having some construction work undertaken, it’s a lot easier. You just need to let those doing the work know that you consider yourself exempt and make sure they record it.

There’s no form to fill in or box to tick but HMRC gives an example of how you could word an exemption claim in its technical guide:

“We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”

In practice, you’ll probably find that any decent building firm will ask you about your exempt status without you needing to prompt them.

It’s worth noting, though, that this actually gives you a choice over whether to apply the reverse charge. There are circumstances in which you might want it to apply to you because it’s helpful for managing the cashflow of your project – you pay less to the builders and have some control over when the VAT payment is made, separately, to HMRC.

If in doubt…

Because this is new legislation that’s already been tweaked multiple times even before it’s gone live, it’s bound to be a bit complicated and confusing.

If you want to be absolutely certain it doesn’t apply to your rental property building project, we’d recommend that any UK Landlord Tax client talks to us for peace of mind.

And if you think it might apply to your property business, or you’d like to talk through the options, get in touch for a conversation about tax planning and VAT.

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