Construction businesses need to prepare themselves for a significant change to the way in which VAT is charged and accounted for on the supply of construction services. The VAT reverse charge comes into force on 1 March 2021 (its earlier implementation date having been delayed) and is being introduced to reduce VAT fraud in the construction industry.
What is the reverse charge?
Where the reverse charge applies, the customer (rather than the supplier) will have to account for VAT to HMRC on supplies. It can also recover it as input VAT in the same period (depending on its VAT recovery position).
What will it apply to?
The reverse charge will apply to the supply of specified construction services together with associated goods. The definition of construction services generally follows the definition of construction services for the purposes of the Construction Industry Scheme (save that the CIS scheme does not extend to the supply of goods) and will apply through the supply chain where payments are required to be reported through the CIS up to but not including ‘end users’ or certain ‘intermediaries’, subject to notification requirements (see more on this below).
The definition includes the construction, alteration, repair, extension, demolition or dismantling of buildings or structures or of works forming part of the land, such as walls, roadworks, power lines and communications apparatus. It also includes the installation of systems in buildings, such as heating, lighting, air conditioning and so on. It also extends to painting and decorating.
It only applies where the customer and supplier are (or should be) registered for VAT and the customer is receiving the supply for business purposes.
When will it apply?
The reverse charge will apply to supplies made on or after 1 March 2021 whether or not under a contract entered into before that date.
What exceptions are there?
There are some notable exclusions. In particular, the reverse charge does not apply where the customer is an ’end user’ and has notified the supplier that it satisfies the relevant requirements of the legislation. The notification can be given in the contract or separately in writing (before the supply is made). An end user is the final consumer of construction work (who is not making an onward supply of construction services). For example, a business commissioning the building of its own office block would be an end user.
The reverse charge does not apply where the customer is an ‘intermediary’ supplier who has notified the supplier that it qualifies as such. An intermediary supplier is a supplier who on-supplies the construction services (without material alteration or further processing) and is either:
- connected with the end user; or
- has a proprietary interest in the land (e.g. lease or licence), and so does the end user (e.g. supplies of construction services between landlord and tenant).
Certain types of construction work are also excluded. For example, drilling for, or extraction of, oil or gas and the manufacture of building or engineering components or equipment or their delivery to site are excluded as is the professional work of architects or surveyors or of consultants in building, engineering, interior or exterior decoration or laying out of landscape. There are other exclusions so parties will need to check the legislation to establish whether the services under their contract are captured.
Finally, the reverse charge does not apply to zero rated supplies.
What about mixed supplies?
Contracts may cover supplies which are a mixture of those which fall within the reverse charge and those which don’t. Generally all supplies under the same contract must all be subject to the reverse charge (if some are).
What should businesses be doing?
Businesses should review their contracts and accounting systems and software before 1 March 2021. Contractors and subcontractors will need to be clear whether they are providing specified services and whether their employer is an end user or excluded intermediary. For new contracts it would be useful to set out the relevant information, including for example whether the parties are registered for VAT, in the contract and deal with any relevant notification requirements.
Given the significant nature of the reverse charges the HMRC guidance acknowledges that businesses may have difficulties in implementing the changes. As such it states that it will apply a “light touch” in dealing with errors that occur in the first 6 months whilst businesses adjust to the new regime as long as businesses are trying to comply and act in good faith. Nonetheless, there are no transitional provisions so businesses should ensure they review and adapt their processes now.
For more information on the article above please contact Nicola Manclark.