Legislation and guidance published for VAT reverse charge in construction
07 November 2018
07 November 2018
Businesses involved in buying and selling construction activities must comply with the VAT reverse charge on building and construction services from 1 October 2019. This is an anti-fraud measure introduced within the statutory instrument VAT (Section 55A) (Specified Services and Excepted Supplies Order 2019) to remove the opportunity for fraudsters to charge VAT and then go ‘missing’ before paying its VAT liabilities to HMRC. It is estimated to impact 150,000 businesses in the construction and building sector.
How will the domestic reverse charge work?
The customer will be liable to account to HMRC for the VAT in respect of purchases of construction services rather than the supplier. The reverse charge applies throughout the supply chain where payments are required to be reported through the Construction Industry Scheme (‘CIS’). It will apply until the point where the customer receiving the supply is no longer a business that makes supplies of construction services (‘end users’). End users will usually be recipients who use the building and construction services for themselves, rather than sell the services on as part of their own business of providing building or construction services.
It is up to end users to make suppliers aware that they are an end user and that VAT should be charged in the normal way instead of the reverse charge. Importantly, HMRC’s guidance states if the end user does not provide this confirmation of its end user status then it will still be responsible for accounting for the reverse charge.
Where a VAT-registered business receives a supply of standard or reduced rate construction services from another VAT-registered business, it must account for that VAT through its VAT return instead of paying the VAT to its supplier. The customer will be able to reclaim the VAT as input tax, subject to the normal rules.
The supplier will need to issue VAT invoices that clearly indicate the supplies are subject to the reverse charge and that the customer is required to account for the VAT. The VAT due should be clearly stated however should not be included in the amount shown as total amount charged. The following examples fulfil the legal requirement;
HMRC have stated that they will “operate a light touch” on genuine mistakes and penalties for a 6-month period after its introduction. There is no guidance on what HMRC would deem as a genuine mistake.
However, if a business knowingly claims end user status when the reverse charge should have been applied then they will be liable for the output tax that should have been paid, as well as potential penalties.
Similarly, to the CIS “mixed contract” provisions, if there is a reverse charge element in a supply then the whole supply will be subject to the reverse charge. Additionally, if the reverse charge has already been applied to a supply on a construction site, if both parties agree, any subsequent supply on that site between the same parties can be treated as being subject to the reverse charge.
The tax points are the issue of a VAT invoice or the receipt of the payment, whichever is earlier (Regulation 90 VAT Regulations 1995). For invoices with a tax point before 1 October 2019, the normal VAT rules will apply. For invoices with a tax point on or after 1 October 2019, the reverse charge will apply.
VAT returns
Suppliers of services must not enter in box 1 of the VAT return any output tax on sales to which the reverse charge applies but must enter the value of such sales in box 6.
Customers must enter in box 1 of the VAT return the output tax on purchases to which the domestic reverse charge applies but must not enter the value of such purchases in box 6. They will reclaim the input tax on their reverse charge purchases in box 4 and include the value of the purchases in box 7, in the normal way.
When is there no need to apply the reverse charge?
Unlike the CIS, there is no deemed contractor provisions whereby purchases become subject to the reverse charge because the purchaser buys a certain amount of construction services in a given period.
Businesses that supply specified services to connected parties within corporate group structure or with a common interest in land will not have to apply the reverse charge.
If the supply does not need to be reported for CIS purposes under Regulation 4 of the Income Tax (Construction Industry Scheme) Regulations 2005, then the reverse charge does not apply as the definition of “construction operations” under section 74 of the Finance Act 2004 is used.
Aspire Comment
In simple terms, provided the recipient of the services is VAT registered and the payments are subject to CIS, then the reverse charge will apply.
As a result, businesses will need to adapt systems and processes to manage applying the reverse charge and to deal with the impact on cash flow where VAT is no longer paid to it by a customer. Businesses who may use VAT as working capital prior to paying it to HMRC will see the biggest impact and will need to manage their cash flow differently.
HMRC’s guidance note states that more detailed guidance will be published during the run-up to 1 October 2019, including updates to the Government VAT for builders page.
See HMRC’s guidance note here which also contains a flowchart to decide whether normal VAT rules or the reverse charge should apply.
See all of the HMRC publications here.