Draft Legislation: VAT reverse charge for construction services

In 2017, Government identified that VAT fraud is evident within the construction sector and so, published a consultation at Spring Budget 2017 to address the issue. At Autumn Budget 2017, Government announced they would be taking forward the measure and that there would be a technical consultation in Spring 2018 with final legislation published in October 2018, a year before the legislation becomes effective on 1 October 2019.  

Government intend for the draft legislation to act as an anti-fraud measure, which removes the opportunity for fraudsters to charge VAT and not pay it to the Exchequer. This is often referred to as ‘missing trader’ fraud.

The draft legislation will make supplies of standard or reduced-rated construction services (‘specified supplies’) between construction or building businesses subject to the domestic reverse charge, meaning that the recipient of those supplies accounts for the VAT due through its VAT return, instead of the supplier doing so, therefore the recipient will not pay the VAT amount to its supplier. The supplier will need to issue a VAT invoice that indicates the supplies are subject to the reverse charge.

The types of construction services covered by the reverse charge are based on the definition of “construction operations” used in the Construction Industry Scheme (‘CIS’) under section 74 of the Finance Act 2004.

The legislation will not apply to specified supplies made to customers who are consumers, or to those that use specified supplies to make other supplies, such as those selling new houses.

Unlike for CIS, there will be no deemed contractor provisions whereby purchases become subject to reverse charge because the purchaser buys a certain amount of such purchases in a given period.

Government predicts that the legislation would raise an extra £405 million for the Exchequer in the first four years of its implementation.