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From 1st October 2019 a VAT reverse charge will apply in the UK to supplies of construction services, whereby the recipient, rather than the supplier, will account for the VAT due.
The HMRC consultation on the draft legislation closed on 20 July 2018, and it is intended that a final version of the draft order and guidance will then be published before October 2018.
HMRC believe they lose over £100m each year in VAT fraud related to the construction industry, so it is unsurprising that they are taking steps to reduce the incidences of fraud and missing payments.
What does it mean?
Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way.
Instead, under the RC, a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT.
The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.
Who will be subject to the new RC?
The reverse charge will apply through the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services.
Supplies to the final business customer or to a domestic customer will therefore usually be excluded from the regime, with VAT being charged and accounted for in the normal way
There are no de minimis limits, but the RC will not apply to associated businesses, with supplies between group companies also being excluded from the RC.
The type of work affected
The definition for construction services in the draft legislation have been lifted directly from the CIS legislation.
The RC will therefore apply to activities such as construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works.
Some works will not be covered and invoicing for these will not change. These include
- professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
- drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- signwriting and erecting, installing and repairing signboards and advertisements
- the installation of seating, blinds and shutters or the installation of security.
Additional paperwork?
This will be a very important change for the construction industry and all businesses using its services. For businesses with multiple VAT rates applicable to their services it may be complex to implement and track, and all businesses will need to consider the impact on cash flow.
Whether anyone should pay VAT on building work, account for VAT on building work, or apply the reverse charge will depend on their role in the project.
One of the main concerns is that traders will face an additional burden of identifying customers who are liable for the RC – i.e. checking VAT registration numbers and obtaining evidence to confirm whether a customer is an ’end user’ or not, so that VAT, if due, is invoiced correctly.
In theory, businesses should have 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. However, this is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital.
Fingers crossed that the guidance promised by HMRC for October 2018 will be comprehensive – watch this space!