VAT changes for the construction industry

The domestic reverse charge will affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS). Therefore, supplies between sub-contractors and contractors will be subject to the reverse charge unless they are supplied to a contractor who is an end user. Broadly, end users are recipients who use the building or construction services for themselves, rather than sell the services on as part of their business of providing building or construction services.

How a domestic reverse charge operates

A domestic reverse charge is a system whereby the customer receiving the supply of specified construction services must account for the VAT due, rather than the supplier. In turn, the customer deducts the VAT due on the supply as an input, meaning no net tax is payable to HMRC. This removes the scope to evade any VAT owing to HMRC.

A domestic reverse charge only applies to supplies between UK taxable persons so that unless the customer is registered or liable to be registered for VAT it will not apply.

Implementation of the reverse charge

HMRC have stated that they will apply a light touch in dealing with related errors that occur in the first six months after introduction, where businesses are trying to comply with the new legislation.

Mixed supplies

Although the legislation is aimed at services, if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. This is apparently to make it simpler for both supplier and customer and to avoid the need to apportion or split out the supply.

There are also a number of exclusions to the reverse charge. In addition, HMRC have released guidance at www.gov.uk/government/publications/vat-reverse-charge-for-building-and-construction-services-guidance-note/guidance-note

You can keep your clients updated on the changes to the construction industry with our client briefing.