HMRC has published extended guidance on the new domestic reverse charge for building and construction services, which will be introduced on 1 October 2019.
The new guidance appears to cover much more detail than was included with the draft legislation in December 2018. But this is such a fundamental change to the VAT rules it seems likely there will be transactions where the new rules create disputes.
The domestic reverse charge (DRC) is a major change to the way VAT is collected in the building and construction industry. It requires the customer receiving the service to pay VAT to HMRC instead of paying it to the supplier.
It will only apply to individuals or businesses registered for VAT in the UK supplying specified services reported under the Construction Industry Scheme (CIS). The DRC does not apply if the service is zero-rated or if the customer is not registered for VAT in the UK. It also does not apply to services which are supplied to ‘end users’ or intermediaries connected with end users. More details are in the HMRC guidance.
There have been updates to the previous draft guidance on the following:
- How to check whether the customer is VAT registered or CIS registered
- How and when it is necessary to check that a customer is an end user or an intermediary
- Changing VAT treatment in the middle of a contract
- Completing VAT returns
- Contracts spanning 1 October: the guidance outlines transitional rules for payments due on any supplies entered into accounting systems before 1 October 2019, but paid on or after 1 October 2019.
- Where large contractors hold many contracts with a single subcontractor: if the DRC applies to more than 5% of those contracts (by volume or value) the HMRC guidance says the DRC may be applied to all the contracts.
HMRC has advised businesses will need to prepare for the change by:
- checking whether the DRC affects either sales, purchases or both
- informing regular clients or suppliers
- ensuring accounting systems and software are updated to deal with the DRC
- considering whether the DRC will have an adverse impact on cash flow as the (legitimate) opportunity to use the amount of VAT paid, between the time it is received from the customer and the time it has to be paid over to HMRC, will no longer exist.
HMRC’s implementation of this change has been subject to criticism. The detailed guidance has been a long time coming and we are now only three months from implementation. The industry had been told there would be a 12-month lead time. For main contractors with hundreds or even thousands of live projects and sub-contractors, there is a lot of work needed to review and collate the necessary information in a very short timeframe.
The implementation date for DRC was originally chosen as being six months after Brexit and Making Tax Digital for VAT, but the introduction of the DRC is going to almost coincide with Brexit, as well as the date for MTD for deferred businesses. So DRC makes a third huge systems issue coinciding in October 2019.
In their original consultation, HMRC proposed that the DRC would apply to ‘labour only’ supplies in the construction industry, identified as the source of the VAT fraud the DRC is intended to target. However, it is now clear that it will only cover the provision of construction services that include materials: “employment businesses” supplying staff are excluded. This has raised questions as to how the DRC will meet HMRC's original policy intention.
Finally, there has been criticism of HMRC’s publicity on this change for sub-contractors, particularly for small businesses.
During the consultation process, HMRC was asked to put warning announcements on the ‘VAT for Builders’ page on Gov.uk, but apparently this can only be used for existing law. The new guidance is not easily found on Gov.uk and doesn’t feature on the HMRC “announcements” page. It remains to be seen if smaller businesses will be prepared by 1 October 2019.
About Linda Skilbeck
Linda is a Senior Manager with Buzzacott 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 and SOC VAT Consultants where she specialised in advising charities, not for profit organisations and property companies, and as a VAT technical writer.
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.