Construction services VAT reverse charge

Draft legislation for the upcoming VAT reverse charge plan for the construction industry has been published.  The reverse charge requires recipients rather than suppliers to account for the VAT due on certain construction services.

The draft legislation indicates that the reverse charge will have a  wider scope than first thought, so businesses in the sector should review their position and follow HMRC’s consultation on the new law.

HMRC first proposed and consulted on the reverse charge in 2017 with the aim of fighting against missing trader fraud in the construction industry.

Under the new regime, a VAT-registered business, which supplies certain construction services to another VAT-registered business, will be required to issue a VAT invoice stating that the service is subject to the reverse charge.

The recipient must account for the VAT through its VAT return, instead of paying the VAT to the supplier, however, the recipient may recover that VAT amount as input tax, subject to normal rules.

The new reverse charge broadly applies to the same range of construction services that have previously fallen under the Construction Industry Scheme.  The reverse charge will apply to those services made between VAT registered businesses where the recipient itself makes an onward supply of the same type of construction services.

These services typically include:

  • Construction, alteration, repair, extension or demolition of buildings or structures
  • Construction, alteration, repair, extension or demolition of part of the land
  • Installation of any systems into a structure including lighting, air con, ventilation etc.
  • Painting/decorating the internal or external surfaces of any building/structure
  • Internal cleaning of buildings and structures as carried out in course of construction
  • Services that form an integral part of services above including site clearance, excavation etc.

However, it will not apply in situations where:

  • Services are supplied directly to the end user such as property owner
  • The recipient makes onward supplies of those services to a connected company
  • The supplier and recipient are landlord and tenant or vice versa
  • The supplies are zero-rated.

The new rules could significantly impact construction businesses in a number of ways, with many construction businesses first needing to adapt their accounting systems to process the reverse charges then make ongoing checks – particularly in respect of the VAT liability of services.

Some businesses may also suffer a loss of cash flow, where VAT is no longer charged.

The full published draft legislation can be found at https://goo.gl/xKL3nc

Julian Borley, Director of VAT at Milsted Langdon, said: “The new legislation will significantly affect a number of construction firms.

“If this affects your business, it is vital that you seek specialist VAT advice to ensure that you are fully prepared for the upcoming changes”

Posted in News.