Under rules to come in on 1 October 2019 builders, contractors and other trades associated with the building industry will have to get to grips with a new way of accounting for VAT.
The measure is designed to combat missing trader VAT fraud in construction sector labour supply chains which HMRC says presents a significant risk to the Exchequer.
Following an initial consultation in March 2017, HMRC has now published draft legislation, a draft explanatory memorandum and a draft tax information and impact note on the so-called Reverse Charge (RC) for construction services. HMRC has asked for comments before 20 July 2018. It is intended a final version of the draft order and guidance will then be published before October 2018.
Under the new rules, supplies of standard or reduced-rated building services between VAT-registered businesses in the supply chain will not be invoiced in the normal way. Under the RC a main contractor would account for the VAT on the services of any sub-contractor and the supplier does not invoice for VAT. The customer (main contractor) accounts for VAT on the net value of the supplier’s invoice and at the same time deducts that VAT – leaving a nil net tax position.
The RC only applies to other construction businesses which then use them to make a further supply of building services, and not to end users eg private individuals, retailers, and landlords. There are no de minimis limits, but the RC will not apply to associated businesses.
Type of work affected
Despite the rather misleading reference to ’construction‘ the RC will, in fact, apply much more widely to services in the building trade, including but not limited to, construction, alteration, repairs, demolition, installation of heat, light, water and power systems, drainage, painting and decorating, erection of scaffolding, civil engineering works and associated site clearance, excavation, foundation works. The definitions in the draft legislation have been lifted directly from the CIS legislation.
Some works will not be covered and invoicing for these will not change. These include
- professional services of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
- drilling for, or extraction of, oil, natural gas or minerals, and tunnelling or boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- signwriting and erecting, installing and repairing signboards and advertisements
- the installation of seating, blinds and shutters or the installation of security.
Questions and preparation
In addition to the technical consultation, HMRC has been engaging with trade bodies, and discussions are ongoing.
One of the main concerns is the burden for traders of identifying customers who are liable for the RC – ie checking VAT registration numbers and obtaining evidence that a customer is an ’end user‘ or not, so that VAT, if due, is invoiced correctly. It seems likely that certification will be required, but none of this is covered in the consultation. There are also questions over the scope of the services covered, and how the supply of ‘white goods’ (where VAT deduction is blocked in most cases), will be dealt with under the RC mechanism.
The idea of having draft legislation and guidance by October 2018 is to allow businesses 12 months in which to make the necessary changes to systems, prior to implementation on 1 October 2019. This is a period in which businesses will also be coping with or preparing for Brexit and Making Tax Digital. Traders used to including VAT in their cash flow projections will also need to adjust.
Affected businesses will need plans in place to ensure that as suppliers they do not charge VAT incorrectly, or as recipients, they apply the RC correctly. Output VAT wrongly applied on an invoice can be collected by HMRC, but will not be recoverable by the recipient, and failure to operate the RC could lead to error penalties.
About Linda Skilbeck
Linda is a senior consultant with SOC VAT Consultants in London and has over 30 years’ experience in VAT. She joined HM Customs and Excise (now HMRC) after University and moved into private practice in the 1980s. She has worked for BDO Stoy Hayward, Grant Thornton and PricewaterhouseCoopers where she specialised in advising charities, not for profit organisations and property companies, and prior to moving to SOC she was a VAT technical writer.
At SOC VAT Linda advises not for profit organisations, charities, and social enterprises on VAT and in particular capital projects, partial exemption, and international services. She is currently Vice chair of the CIOT Indirect Tax Technical Committee and a member of the VAT Practitioners Group.