Reverse charge VAT for the Construction Industry

News Update – September 2019:

The Government has just announced that it will delay the introduction of VAT Reverse Charging by a year after it was heavily criticised for rushing through the changes without consultation with trade bodies and organisations in the Construction Industry. Implementation will now be delayed until 1 October 2020.

Our original update as follows:

As if Making Tax Digital for VAT has not been enough of an upheaval for business registered for VAT, for businesses in the construction industry, another major change comes into force on 1 October 2019.

Introducing reverse charge VAT for the Construction Industry

HMRC are introducing a new domestic reverse charge VAT for the construction industry, which will require the recipient rather than the supplier to account for the VAT due on certain construction services.The aim of this measure is to combat missing trader fraud in the construction sector, in other words businesses charging customers VAT on their invoices and then disappearing without paying the liability over to HMRC.

HMRC have only recently published guidance on reverse charge VAT for building services, giving those affected not much time to prepare before it comes into force. The detailed guidance had been a long time coming for those affected, after the legislation was first drafted in December 2018 following last year’s Budget, and such a fundamental change to the VAT rules in one of the most complex industries seems bound to create disputes after it comes into force in the autumn.

What is the reverse charge?

Under the new regime, a VAT-registered business, which supplies certain construction services to another VAT-registered business for onward sale (rather than direct to the end customer), will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge. As a result, it is the recipient that must then account for the VAT due on that supply through its VAT return, instead of paying the VAT amount to the supplier. The recipient of the supply may recover that VAT amount as input tax, subject to the normal rules, meaning their position is VAT neutral.

This new domestic reverse charge will apply to supplies of ‘specified services’ between VAT registered businesses where the recipient then makes an onward supply of those same services. Specified services are generally services that are defined as construction operations for purposes of the Construction Industry Scheme (CIS). The domestic reverse charge will apply to specified services unless:

The services are supplied to an end user (e.g. the property owner) or directly to a main contractor that sells or lets a newly completed building
The recipient of the services is not VAT registered, or required to be VAT registered
The recipient is not registered for the CIS
The supplier and recipient are landlord and tenant or vice versa, or
The supplies are zero-rated, such as work on new residential property.

Despite these changes, any invoices for services subject to the domestic reverse charge must still include all the information required on a normal VAT invoice, as currently. However, in addition the invoice must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT.

When to use the reverse charge legislation

How to prepare for reverse charge VAT

If you supply services under the construction industry scheme, the Revenue recommends you take these steps to prepare before 1 October 2019.

Construction businesses will need to ensure their accounting systems are capable of processing reverse charge transactions and make ongoing checks to ensure that supplies and purchases are correctly treated. As the VAT amount must still be shown on invoices subject to the domestic reverse charge, there is a clear risk that suppliers will pay the VAT over to HMRC in error and similarly customers will reclaim it in error.

Subcontractors that rely on VAT collected from their customers as working capital until they have to pay it to HMRC, potentially four months later, are likely to suffer from the loss of cash flow. These businesses will need to consider if payment terms need to be renegotiated to avoid problems.

Services affected by the reverse charge

The reverse charge for VAT applies if your VAT-registered business supplies constructing, altering, repairing, extending, demolition or dismantling services.

This applies to buildings, structures, walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours.

For a comprehensive list of services that are affected by the reverse charge for VAT, go to GOV.UK

Critics round on HMRC

The construction industry had been expecting the guidance to be released 12 months before the change takes effect and the Revenue has been criticised for the way it has implemented the reverse charge, particularly the amount of time it has taken to issue the detailed guidance.

If you require any further information or guidance, please arrange to speak to myself or your usual Lambert Chapman contact.

Posted by Mike Carabine

Disclaimer
The views expressed in this article are the personal views of the Author and other professionals may express different views. They may not be the views of Lambert Chapman LLP. The material in the article cannot and should not be considered as exhaustive. Professional advice should be sought in connection with any of the issues contained in the article and the implementation of any actions.