VAT reverse charge for construction services

The VAT domestic reverse charge for building and construction services is now scheduled to come into effect from 1 March 2021. The original introduction date was changed from 1 October 2019 to 1 October 2020 and revised again in June 2020 due to the impact of Covid-19. The legislation has not changed since it was enacted in 2019 except for a useful change to the requirements placed on ‘end users’ and ‘intermediary suppliers’.

A domestic reverse charge means that a contractor receiving a supply of specified construction services must account for the output VAT due, rather than the sub-contractor who supplied the services. The contractor also deducts the VAT due on the supply as input VAT, subject to normal VAT rules, meaning no net tax is usually payable to HMRC. The reverse charge thus removes the scope to evade any VAT owing to HMRC by the sub-contractor.

The charge affects only supplies at standard or reduced rates where payments are required to be reported via the Construction Industry Scheme (CIS). It does not apply:

• to zero-rated supplies
• to services supplied to ‘end users’ or ‘intermediary suppliers’ who have given written confirmation of their status to their supplier in respect of the services supplied
• to an employment business supplying either staff or workers.

The workings of the scheme

A VAT-registered business, supplying ‘specified services’ to a VAT and CIS registered business, other than an end user or intermediary supplier:

• issues a VAT invoice indicating the supplies are subject to the reverse charge and that the customer must account for the VAT. The invoice does not therefore charge any amount for VAT. It should, however, state how much VAT is due, or the rate of VAT, if the VAT amount cannot be shown.

The business receiving the supply of specified services:

• does not pay output VAT to its supplier on supplies received from them
• accounts for the output VAT on supplies received through its VAT return
• reclaims the VAT on supplies received as input tax, subject to normal VAT rules.

Specified services

Generally, construction services covered by the reverse charge are those falling within the category of ‘construction operations’ for CIS. There are two particular points to note.

• The reverse charge includes goods, where supplied with specified services. This is different from the CIS scheme, where CIS payments to sub-contractors who are subject to income tax deductions, are apportioned to exclude the materials content.
• Services excluded from the definition of construction operations for CIS are similarly excluded from the VAT reverse charge, where these are supplied on their own. But, where such services are supplied with services subject to the reverse charge, the whole supply is subject to the reverse charge, as is the case for the CIS scheme.

HMRC guidance provides a ‘5% disregard’ if the reverse charge part of the supply is 5% or less of the value of the whole supply.

Also, if there has already been a reverse charge supply on a construction site, any subsequent supplies on that site between the same parties may be treated as reverse charge supplies, if both parties agree. Where there is any doubt, HMRC’s guidance states the reverse charge should apply, if the recipient is VAT-registered and payments are subject to CIS.

End users and intermediary suppliers

The domestic reverse charge applies to VAT-registered businesses throughout the CIS supply chain, but is designed not to apply to ‘end users’ or ‘intermediary suppliers’. End users are VAT and CIS registered businesses receiving supplies of specified services which are not sold on as construction services.

Intermediary suppliers are VAT-registered businesses in receipt of CIS supplies who are connected or linked to end users. Examples could be landlords and tenants, or recharges of building and construction services within a group of companies.

Determining if supplies are being made to end users or intermediary suppliers

Businesses need to know when they are dealing with an end user or intermediary supplier, so that they can invoice appropriately. Due to the difficulties that may have arisen to suppliers, an amendment has been to the legislation requiring end users and intermediary suppliers to notify their suppliers of their status in respect of a particular construction service contract.

If no confirmation is given, the supplier should issue a reverse charge invoice.

HMRC guidance

HMRC has now issued revised guidance. This link sets out what businesses  need to do and has links to further guidance: bit.ly/2WHQ5R2. There is also a technical guide: bit.ly/2F7tuKU.

Keep your clients up-to-date with the key measures announced and what they could mean to them with an informative client letter.