VAT reverse charge for construction services
What is happening?
HMRC has launched a consultation on the proposed draft VAT legislation to implement a reverse charge for certain supplies within the construction industry. HMRC’s view is that this will substantially reduce fraud and result in additional VAT for the treasury of around £100M per year.
It is clear that the government is pressing ahead with this change, due to come into force on 1st October 2019, as this is merely a technical consultation to review the proposed scope and definitions (the decision was made at the end of 2017 to implement the reverse charge). HMRC recognise businesses will need time to adapt and therefore there is a long lead-in time, as well as a ‘soft-landing’ approach to penalties after implementation.
What is the Reverse Charge?
Many businesses will be familiar with the reverse charge if they have been involved in providing or receiving services to/from overseas clients. Although the reverse charge is also a VAT simplification, it is an effective fraud prevention measure. It was introduced initially to the supply of mobile phones and computer chips, and more recently, has been applied to transactions in other sectors including wholesale gas & electricity and wholesale telecommunications. That being said, with around 300,000 businesses operating in the construction sector, this is certainly a far more wide-reaching VAT change.
The principle of the reverse charge is a relatively simple one. Rather than the supplier charging VAT to their customer in the normal way, no VAT is charged and instead, the supplier informs the customer to account for VAT using the reverse charge. This is a ‘tax-shift’ whereby the customer shows the supply on their VAT return as both a sale and a purchase – with the result often being a ‘paper exercise’ (subject to the usual VAT recovery rules). The introduction of the reverse charge does not affect the actual VAT liability of the supply being made.
What do I need to consider?
Firstly, businesses should determine if the reverse charge will apply by considering both their position in the supply chain and the type of services being provided (zero-rated services are excluded). Typical businesses affected will include those providing construction services as a sub-contractor to a contractor providing onward construction services. However, supplies made to consumers or the final business using the services provided, are excluded.
Businesses should also review their accounting systems and invoicing procedures. Cashflow management should be considered as some businesses use VAT received from customers as part of working capital. There is also a potential negative impact for suppliers that use the Flat Rate Scheme.
The consultation on the draft legislation runs until 20 July 2018. HMRC plan to publish a final version of the legislation, as well as new guidance, by October 2018.
More information on the consultation and draft legislation (including making a submission to HMRC) can be found by using the following link – https://www.gov.uk/government/consultations/draft-legislation-vat-reverse-charge-for-construction-services
If you have any queries or concerns about the Reverse Charge please get in touch with our VAT team by contacting Maria McConnell (VAT Director) at firstname.lastname@example.org or William Wallace (VAT Manager) at email@example.com or call 0141 221 2984.