The guidance that was worth waiting for - VAT reverse charge in construction

The guidance that was worth waiting for – VAT reverse charge in construction

• Government has published anticipated guidance on VAT reverse charge in construction
• A supply of staff is not subject to the reverse charge – a construction service is captured by the reverse charge

Albeit a little later than expected, the arrival of this guidance is a big sigh of relief for agencies and umbrella companies supplying staff within a construction supply chain, as it confirms that the VAT reverse charge which is due to take effect on 1 October 2019 does not apply to them.

The guidance states the important distinction between supplying staff and supplying construction services is that the individual workers are employed or paid by the employment business and not by the construction business that uses them to provide construction services.

Initially there was some confusion over this point due to the wording of the legislation. Aspire has previously set out an explanation of why the reverse charge wouldn’t apply following our conversations with the contact listed on HMRC’s guidance, Nick Chambers, VAT Serious Non-Compliance and Fraud Team.

The guidance sets out the reverse charge will work, how to determine if your supply is caught and advises businesses who will be caught by the reverse charge who will be “repayment traders” (i.e. VAT return is a net claim from HMRC instead of a net payment) to apply to move to monthly returns to speed up payments due from HMRC.

The initial guidance published in November 2018 confirmed HMRC will apply a “light touch” in dealing with errors made in the first 6 months of the new legislation. This guidance expands on this by saying this applies so long as you are trying to comply and have acted in good faith. The guidance also states HMRC officers may assess for errors during the light touch period, but penalties will only be considered if you are deliberately taking advantage of the measure by not accounting for it correctly.

Whilst preparation for the reverse charge will not be as troublesome as expected for umbrella companies and agencies, there is still some work to be done.

We recommend that you review your contractual documentation and billing process throughout your construction labour supply chain and ensure that the supply of labour is referenced, as opposed to the supply of a construction service captured within the definition of the VAT legislation.