Construction Services – VAT Reverse Charge from 1 October 2019
Further to our previous post on this matter back in May (found here), HMRC have now updated their draft legislation and published a Policy Paper, confirming that the VAT reverse charge on certain building and construction services will come into effect on 1 October 2019.
What is a “Reverse Charge”?
By way of a recap, the reverse charge is a mechanism to remove the risk of VAT being charged to customers but not passed over to the Revenue by the supplier. It is used in a variety of circumstances and this new policy is aimed at tackling missing trader fraud within the construction sector. The application of a construction services reverse charge will mean that the supplier does not charge VAT on the value of their supplies to a business customer. The responsibility to account for this output tax will instead be passed to the customer (i.e. the customer is treated, for VAT purposes, as being both the customer and the supplier). The actual supplier will still be required to issue a VAT invoice to the customer and should include a narrative stating that the service is subject to the reverse charge.
The customer must then account for VAT at the appropriate rate itself (instead of paying this VAT to the supplier) and can subsequently recover the amount of VAT as input tax, subject to the normal rules.
Effect of the Changes
This new reverse charge will apply to certain supplies of construction services (“specified services” – see below) where they are made between two VAT registered businesses (i.e. B2B) and the recipient then makes an onward supply of the same construction services. The reverse charge will apply through the supply chain up to the point where the customer receiving the supply is not a business that makes supplies of specified services – these businesses are referred to as “end users”.
Businesses Excluded: The reverse charge will exclude businesses that supply “specified services” to connected parties within a corporate group structure or with a common interest in land. In these circumstances, the supplies in question will then revert to normal VAT accounting rules.
The original proposal was that the reverse charge would apply to labour only supplies of construction services. However, the updated Policy Paper (found here) confirms that the reverse charge will also apply to goods where those goods are supplied with the specified services.
What are “Specified Services”?
Specified services within the construction sector are those in the definition of “construction operations” used in the Construction Industry Scheme (CIS) under Section 74 of the Finance Act 2004. These are:
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;
- construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines etc.;
- installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
- painting or decorating the internal or external surfaces of any building or structure; and
- operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
If a supply contains a mixture of specified and other construction services, it will be classed as a single supply of specified services and the reverse charge will apply.
These changes will affect businesses within the construction sector significantly. Whilst the changes come into effect from 1 October 2019, it is advised that such businesses consider the impact sooner rather than later. Outside of the VAT accounting process changes there will be a significant negative Cashflow impact as suppliers no longer charge and receive the VAT amount due on invoices to their relevant customers.
Important VAT process points include that:
- the recipient will be responsible for determining the correct VAT treatment – this is the supplier’s responsibility under current rules and you, as recipient, may not be familiar with the different possible VAT liabilities; and
- the parties involved must be aware of who the end user is (to determine whether the reverse charge applies or not). Under current rules this would not necessarily matter and so is not information that is usually sought after.
Businesses should use the time up until 1 October 2019 to review supplies (either made or received) to other VAT registered businesses to determine how these will be subject to the new rules.
If your business is affected, or you are unsure of any VAT aspect of the new rules, please contact a member of the Centurion team on 01633 415390 or firstname.lastname@example.org to discuss in more detail.
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