VAT Reverse Charge for Construction Services
HMRC’s VAT domestic reverse charge for construction services is due to come into force from 1 October 2020. The aim of the measure is to tackle VAT fraud in the construction industry. Whilst the changes have been announced for a while, HMRC have only recently provided detailed guidance.
The new rules will impact on the cashflow for some businesses. We’d recommend that all businesses in a construction supply chain make sure they are aware of the impact of the new rules, we would be keen to help with this and work through any resulting issues with you.
Under the new rules from 1 October 2020, a VAT-registered business, which supplies certain construction services to another VAT-registered business for onward sale, will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge. However, it is the recipient that will be required to account for the VAT due on that supply through its VAT return (subject to some exceptions), instead of paying the VAT amount to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules governing input tax recovery.
Scope of the Changes
The reverse charge is due to apply to certain supplies between VAT registered businesses where the recipient then makes an onward supply of those specified services. Generally services included are those defined as construction operations for purposes of the Construction Industry Scheme (“CIS”). Those relevant include; construction, alteration, repair, extension, painting and decorating, plus the demolition of buildings, civil engineering and the installation of heating, lighting and air-conditioning. HMRC have highlighted some exceptions where the new rules won’t apply, including:
- The services are supplied to an end user, such as the property owner, or directly to a main contractor that sells or lets a newly completed building;
- The recipient makes onward supplies of those construction services to a connected company;
- The recipient is not VAT registered, or required to be VAT registered;
- The recipient is not registered for the CIS;
- The supplier and recipient are landlord and tenant or vice versa, or
- The supplies are zero-rated.
Some services will not fall within the scope of the domestic reverse charge; however, where there is a reverse charge element in a supply then the whole supply may be subject to the domestic reverse charge. Where goods and building materials are provided together with construction services and in the course of the construction work then the reverse charge also applies to these goods. There may be cases where it is difficult to determine if there is a separate supply of goods that is excluded from the reverse charge, or whether they are to be included as part of a single supply of construction services.
Invoices for services subject to the domestic reverse charge need to include all the information required on a normal VAT invoice. However, they must make it clear that the domestic reverse charge applies and that the customer is required to account for the VAT. As yet, there is no specific wording but HMRC provide examples that will need to be considered, BHP can provide support to clients in this regard.
Impact on Construction Industry
Construction businesses will need to ensure accounting systems are capable of processing reverse charge supplies and make ongoing checks to ensure that supplies and purchases are being correctly treated for VAT purposes. As the VAT amount must still be shown on invoices subject to the domestic reverse charge, a potential risk is that suppliers will account for the VAT to HMRC in error and customers will recover it from HMRC.
Subcontractors that rely on VAT collected from their customers as working capital before they are required to account for it to HMRC, may suffer from the loss of cash flow as a result. These businesses and even their customers will need to consider if payment terms need to be revisited to combat this issue.
How can BHP support you?
Construction businesses should:
- Review all supplies made to and received from other VAT registered contractors and sub-contractors to establish whether these will be subject to a reverse charge from 1 October 2020;
- Obtain notification from customers that they are an end user and confirmation of their VAT registration and CIS status;
- Consider any modifications required to ensure accounting systems can deal with the change; and
- Consider the impact on cash flow from 1 October 2020 and if there are any other ways to manage this proactively.
We can provide support in relation to all of the above. If you require any assistance or advice in preparation for the changes, please contact Simon Buchan (firstname.lastname@example.org) or Andy Horsfield (email@example.com) for further details. We will also be shortly arranging a VAT forum session to discuss the changes with you.