Construction companies face a number of tax and administrative rules that are barely found in other sectors. Anyone who hires subcontractors, or who works as a subcontractor themselves, has to deal with the VAT reverse-charge scheme and often with a G-account as well. On top of that, construction revolves around large purchase invoices for materials and projects that can run over several months or even years. In this article we discuss the key points of attention for bookkeeping in the construction sector.
Short answer
The main particularities in construction are the VAT reverse-charge scheme for subcontracting, under which it is not the subcontractor but the main contractor who remits the VAT, and the G-account, a blocked account used to limit the risk of chain liability for payroll taxes and VAT. On top of that, construction requires careful processing of large purchase invoices for materials and of projects that run over longer periods. Bookkeeping that is properly set up on these points prevents problems with VAT returns and with any inspections.
Subcontracting: who invoices whom?
In construction, main contractors often work with subcontractors for specific parts of a project, such as installation work, roofing or plastering. For your bookkeeping it is important to be clear about who actually acts as main contractor and who as subcontractor, because this directly determines how VAT on the invoice must be treated and what risks apply around chain liability.
A subcontractor generally invoices the main contractor, or another subcontractor further up the chain, rather than the end client directly. The main contractor in turn invoices the total project, including the subcontractors' work, to the client. This chain can contain several links, and at every link the same rules apply around VAT reverse charge and, where applicable, the G-account.
The VAT reverse-charge scheme for subcontracting
Normally, an entrepreneur charges VAT to their client and then remits that VAT to the Tax Authorities. With subcontracting in construction, however, the reverse-charge scheme often applies: the subcontractor does not charge VAT on their invoice, but states that VAT has been reverse-charged to the main contractor. The main contractor then declares the VAT themselves in their own VAT return, both as VAT due and, where applicable, as input tax.
This scheme is intended to prevent fraud in a sector where subcontracting chains can sometimes be long and complex, and where there is a risk that a subcontractor charges VAT but never remits it, while the main contractor still reclaims that VAT as input tax. By placing the VAT obligation with the main contractor, this risk is limited.
In concrete terms, this means that on a reverse-charged transaction you do not state a VAT amount on your invoice, but you do state the text "VAT reverse-charged" and the buyer's VAT number. If you forget this, it can lead to disputes with both your client and the Tax Authorities about who actually owes the VAT.
The reverse-charge scheme does not simply apply to every subcontractor in construction. It is intended for work of a material nature on immovable property, in other words for actual construction, maintenance or installation work itself. Purely intellectual or coordinating activities, such as those of an architect or a construction supervisor who only oversees the work, generally fall outside this scope. The reverse charge also does not apply if the subcontractor carries out more than half of the work at their own business premises, for example when a large part of a structure is first built in their own workshop and only assembled on site afterwards. If you are unsure whether the reverse charge applies to your specific situation, have this assessed per assignment, because an incorrectly applied or missed reverse charge is harder to correct afterwards than to prevent beforehand.
Example
A main contractor builds a commercial property for a client and outsources the installation work to a subcontractor. The subcontractor sends an invoice of 40,000 euros excluding VAT to the main contractor, stating "VAT reverse-charged" instead of a VAT amount. In their own VAT return, the main contractor declares 21% of this amount as VAT due, and at the same time deducts it again as input tax, to the extent they are entitled to do so. On balance, this specific transaction is therefore VAT-neutral for the main contractor, but it still needs to be correctly reflected in the return.
The G-account: protection against chain liability
Besides VAT, construction also carries the risk of chain liability for payroll taxes and, in certain situations, VAT. If a subcontractor fails to remit their payroll taxes, the Tax Authorities can, in certain cases, hold the main contractor liable for this, because the main contractor is deemed responsible for the chain in which they operate.
To limit this risk, a contractor can make use of a G-account, where the G stands for "geblokkeerd" (blocked). This is a special, blocked bank account held by a subcontractor, specifically intended to receive the part of an invoice meant for payroll taxes and, in some cases, VAT. The main contractor transfers the agreed part of the invoice intended for these levies directly to the subcontractor's G-account, rather than to their regular business account.
Money in a G-account may only be used by the subcontractor to remit payroll taxes and VAT to the Tax Authorities, or to transfer to the G-account of another party in the chain. This keeps the amount intended for these levies out of reach of other creditors, and it allows the main contractor, when depositing into the G-account, to rely on a release from liability for the amount deposited, provided the applicable conditions are met.
For your bookkeeping, working with a G-account means you have to split payments: part goes to the subcontractor's regular account, part to the G-account. This must be recorded consistently and with proper supporting documentation, so that in the event of an inspection it is clear which part was deposited for what purpose.
Example
A subcontractor sends an invoice of 25,000 euros for plastering work. It is agreed that 20% of this amount, intended for payroll taxes, will be deposited into the subcontractor's G-account, with the rest going to the regular business account. The main contractor therefore transfers 5,000 euros to the G-account and 20,000 euros to the regular account. The subcontractor can then use the amount in the G-account exclusively to pay their payroll taxes to the Tax Authorities.
Large purchase invoices and project administration
Construction projects often come with large purchase invoices for materials, such as concrete, timber, steel or installation materials, which sometimes have to be prepaid before the project has actually started. This calls for bookkeeping that gives insight into the margin per project, not just into total revenue and costs over an entire year. It is therefore preferable to work with a project administration in which purchasing, subcontracting, staff costs and revenue are allocated per project, so that for each job you can see whether the margin matches the original calculation.
In addition, for large projects that run over several months, it is important to think about the right method of profit recognition: do you only recognise profit on completion, or on an interim basis according to the project's progress? This has a direct effect on the picture your annual figures give and deserves to be discussed with your bookkeeper, certainly for larger and longer-running projects.
Practical recommendations for construction companies
- Make sure that every invoice to which the reverse-charge scheme applies correctly states the text "VAT reverse-charged" and the buyer's VAT number.
- Assess for each collaboration with a subcontractor whether a G-account is advisable, and record the agreements made about this in writing.
- Keep purchase invoices for materials linked to the correct project, so you can assess the margin per job.
- For long-running projects, discuss with your bookkeeper which method of profit recognition best fits your situation.
- Periodically check that VAT reverse charge and G-account deposits are processed consistently and correctly in your bookkeeping, for example before every VAT return.
Frequently asked questions
Is the VAT reverse-charge scheme mandatory for every form of subcontracting in construction?
The reverse-charge scheme applies in principle to subcontracting of work on immovable property, such as construction, maintenance and installation work, where the client is an entrepreneur. Whether the scheme applies in a specific situation depends on the precise nature of the work and the contractual relationships, so have this assessed on a case-by-case basis if in doubt.
When am I obliged, as a main contractor, to work with a G-account?
There is no general legal obligation to always work with a G-account, but it is a way to limit the risk of chain liability. In practice, many main contractors and subcontractors deliberately choose to use one, certainly for longer collaborations or higher invoice amounts.
What happens if I accidentally charge VAT while the reverse-charge scheme applied?
This can lead to disputes with both the Tax Authorities and your client, because the invoice then does not meet the correct requirements. It is advisable to correct such a mistake as quickly as possible with a proper credit note and a new invoice with the correct statement.
Does the reverse-charge scheme also apply if I work as a self-employed person (zzp'er) in construction?
Yes, self-employed people who work as a subcontractor can also be subject to the reverse-charge scheme and sometimes to a G-account, depending on the agreements with the main contractor. It makes no difference to the application of these rules whether you operate as a sole proprietorship or as a BV.
Take a look at our approach to bookkeeping for construction companies.
