Background
The domestic reverse charge was first proposed and consulted on in 2017 and aims to combat
missing trader fraud in the construction sector. Its introduction was delayed due to Brexit and the
COVID-19 Pandemic; however, companies must use the reverse charge from 1 March 2021.
If you’re VAT registered in the UK, supply building and construction industry services and:
- Your customer is registered for VAT in the UK
- Payment for the supply is reported within the Construction Industry Scheme (CIS)
- The services you supply are standard or reduced rated
- You’re not an employment business supplying either staff or workers, or both
- Your customer has not given written confirmation that they are an end-user or intermediary
supplier
Under the new regime, a VAT-registered business, which supplies certain construction services to
another VAT-registered business for onward sale will be required to issue a VAT invoice stating that
the service is subject to the domestic reverse charge.
The recipient must then account for the VAT on that supply itself through its VAT return at the
appropriate rate, instead of paying the VAT to the supplier. The recipient may recover that VAT
amount as input tax, subject to the normal rules.
Which services will it apply to?
The new domestic reverse charge will apply to B2B supplies of those services between VAT-registered businesses where the recipient then makes an onward supply of the same construction
services. The legislation is designed so that if there is a reverse charge element in a supply then the
whole supply will be subject to the domestic reverse charge.
Any subsequent supplies on construction where the domestic reverse charge has applied
previously may also be covered by the domestic reverse charge if both parties agree. This has been
introduced to speed up the decision-making process on whether the domestic reverse charge should
apply.
- Therefore, it will not apply where:
- Services are supplied to the end-user, such as the property owner, or directly to a main
- a contractor that sells a newly completed building to the customer.
- The recipient makes onward supplies of those construction services to a connected company.
- The supplier and recipient are landlord and tenant or vice versa, or
- The supplies are zero-rated.
The Government’s original proposal stated that the reverse charge would apply to ‘labour only’
supplies of construction services. However, HMRC’s now states that it will also cover the provision of
construction services that includes materials. This will bring many more construction businesses into
the reverse charge than first thought.
How will this affect construction businesses?
HMRC acknowledges that the impact on the industry is potentially significant – construction
businesses must first adapt their accounting systems to process reverse charge supplies then make
ongoing checks to ensure that supplies and purchases are correctly treated. HMRC also notes that
some businesses may suffer a loss of cash flow where VAT is no longer charged, i.e., they will no
longer be able to use the VAT they collect from customers as working capital before they pay it over
to HMRC.
The reverse charge could also create other issues for operators beyond those highlighted by HMRC,
including the following:
Depending on their nature, construction services may be subject to VAT at the standard rate of
20%, the reduced rate of 5% or zero-rated. Under the new reverse charge, the recipient would
be responsible for identifying the correct VAT treatment of a service provided to them by
another contractor, which may not always be simple to verify.
To determine whether the reverse charge applies, it will be necessary for contractors to
disclose to their subcontractor whether they are at the end of the supply chain – information
which could, in some cases, be commercially sensitive.
If the end-user does not provide its supplier with confirmation of its end-user status, the end-user will be responsible for accounting for the domestic reverse charge. However, it is not clear
if there will be any penalties for not confirming end-user status or what enforcement action
HMRC may take on this issue.
What action should construction businesses take?
Construction businesses should:
- Review supplies made to and received from other VAT registered contractors to establish
whether these will be subject to a reverse charge from March 2021; - Consider the adaptions that will need to be made to their accounting systems to deal with this
change; and - Consider the impact on their cash flow from March 2021 of not receiving the VAT from their
customer and if there are any other ways to mitigate this impact.
For more information, go to the GOV.UK website and follow the link:
How to use the VAT reverse charge if you supply building and …
Or alternately call our office for further guidance.
