Jan Garioch reports on proposals to introduce a reverse charge on construction services from 1 October 2019.
The VAT reverse charge for construction services is to be introduced next year from 1 October 2019. The timing presents a challenge as it comes shortly after businesses will have grappled with MTD and Brexit impacts. The aim of this measure is to tackle missing trader fraud, where VAT charged to a customer is not remitted to HMRC. The reverse charge approach has had some success in tackling this fraud in other sectors where it was rife, for example, mobile phone supplies. HMRC expect to stop fraud worth £100 million per annum by applying a reverse charge to the construction sector, but there is a risk that the fraud will migrate to another sector in the face of this clamp down.
The final version of the draft order and guidance on this reverse charge was published on 7 November 2018. The type of work which will fall within the reverse charge includes construction, alteration, repair, extension and demolition of buildings or structures, including offshore installations. It also applies to works that form part of the land, like roads, runways, railways, sewers and coastal defences. Furthermore, it covers the installation of systems for heating, ventilation, drainage, preparatory services like site clearance and decorating services. Services that fall outside the reverse charge include architect services and the manufacture of building components, materials and plant. However, goods that are not supplied separately and independently of the construction services will also be included in the reverse charge.
Looking at implications throughout the supply chain, subcontractors will still have to be VAT registered if they are over the threshold, and they will have to issue a VAT invoice which indicates that the supplies are subject to reverse charge. However, they will not charge VAT on their subcontract services which represents a loss of cash flow benefit to them. They may also face additional delays creeping into their cash flow. For example, HMRC may question repayment returns before paying out.
The contractors who have to reverse charge should be able to recover the VAT so there is no net effect. However, the onus falls on them to ensure they don’t pay VAT to a subcontractor in circumstances where they should be reverse charging, and staff may require training in advance of 1 October 2019. Since there are complex rules and mixed VAT liabilities involved in the construction sector there have been calls for HMRC to apply a light touch on penalties until businesses become familiar with the new provisions.
At the final stage of the supply chain, the contractor needs to know whether he is dealing with the final customer, because the reverse charge only applies between businesses in the construction supply chain and he must charge VAT to the end consumer. HMRC’s guidance states that it is up to the end user to make the supplier aware that they are an end user and should be charged in the normal way. This should be in written form and retained for future reference. (It is a point to be considered as contracts are drafted for work which will run beyond 1 October 2019). If the end user does not give notice of their end-user status they will still be accountable for accounting for a reverse charge.
By Jan Garioch, CA
16 November 2018
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