VAT domestic reverse charge for building and construction services

…Part 2 – services covered, end users and intermediary suppliers, HMRC policy and planning for the new regime

HMRC Delay

HMRC have announced that the reverse charge process will not now be implemented until 1st March 2021.

Update: 17/08/2020

As part of the governments clamp-down on VAT fraud, they are introducing the VAT domestic reverse charge for building and construction services with effect from 1 October 2019.

In this article we cover what type of services or covered and the meaning of end-users for this process, together with action points for you to consider. For the background in relation to this new measure and how it will work, please see part 1 of this article.

House ConstructionSpecified services covered by the reverse charge process

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 they are 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.

As it can be difficult to determine in some situations whether the reverse charge applies, 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 recommends reverse charging, if the recipient is VAT-registered and payments are subject to CIS.

End users and intermediary suppliers

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-registered businesses receiving supplies of specified services which are not sold on as construction services. Examples could be a construction firm selling an interest in land as a newly-built office, or a large retail business having trading premises built for its own use.

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.

Businesses will need to know when they are dealing with an end user or intermediary supplier, so that they can invoice appropriately. The end user or intermediary supplier should inform the supplier of their status so that VAT can be charged as normal. If the end user does not provide confirmation of status, the supplier should issue a reverse charge invoice.

There are practical difficulties that may arise here. One way to navigate the issue, for businesses dealing frequently with end users, may be to include a statement in business terms and conditions to the effect that it is assumed that the customer is an end user, unless they indicate otherwise.

HMRC policy

HMRC has now issued technical guidance

There will be a ‘light touch’ on genuine errors for six months from October, where businesses are aiming to comply and act in good faith. Businesses knowingly claiming end user status when the reverse charge should have applied, however, will be liable for the tax due, and may be liable for penalties.

Planning for the new regime

Key action points:

  • establish when the reverse charge is likely to apply to supplies to and from other VAT-registered contractors and sub-contractors you deal with. Before you can apply the reverse charge you need to be satisfied that your customer is VAT-registered and your contract is within the CIS
  • check that your accounting systems will calculate and report reverse charge supplies. Invoices will need to specify that the reverse charge applies
  • establish procedures for additional information you will need from some of your customers
  • consider the training staff will require to deal with the new rules
  • estimate the cash flow consequences on your business if you no longer hold output tax. It may be that changing to a monthly VAT return cycle to accelerate payments due from HMRC would be of benefit.

If you are a supplier using the Cash Accounting Scheme or the Flat Rate Scheme, neither of these schemes can be used for the supply of services that are subject to the reverse charge. This may mean that it is no longer beneficial to use these schemes.

How we can help

The change means that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. The reverse charge may highlight that some construction services may not have been correctly classified in the past. For these reasons, we would recommend taking stock of VAT and CIS compliance across the board.

Please contact us for an in-depth discussion, or for advice on cash flow and financial management strategies to help your business adapt successfully to the new regime.

This article provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore, no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this article can be accepted by the author or Essex Abel Ltd.