Postponement of the UK VAT domestic reverse charge

At the start of September HMRC issued a short briefing announcing that it would be postponing the introduction of the domestic reverse charge for construction services, due to come into effect for the start of October 2019, for a period of 12 months until 1 October 2020.

The VAT domestic reverse charge for building and construction services, is a significant change to the way VAT is collected, in the building and construction industry, designed to combat VAT fraud throughout the sector’s supply chain.

The postponement was, in part, due to concerns raised by many in the industry about many businesses not being ready to implement the changes in time for the original 1 October 2019 deadline, along with the recognition of the desire to avoid changes taking place at the same time as the UK's potential exit from the European Union.

Indeed, data published earlier this summer by the Federation of Master Builders (FMB) showed that:

• Over two-thirds of construction SMEs (69%) had not even heard of reverse charge VAT; and
• Of those who have, more than two-thirds (67%) had not prepared for the changes.

Thus, the scheduled October 2019 introduction date would have resulted in potential chaos for the construction industry.

Instead, the Government briefing indicated that: “In the intervening year, HMRC will focus additional resource on identifying and tackling existing perpetrators of the fraud. It will also work closely with the sector to raise awareness and provide additional guidance and support to make sure all businesses will be ready for the new implementation date.”

The domestic reverse charge means a UK customer, within the construction industry,  who receives supplies of construction services must account for the VAT due on these supplies on their VAT return rather than the UK supplier. Importantly, the reverse charge shifts the responsibility for accounting to HMRC for VAT, from the supplier to the recipient, which is more typically a larger corporate business, who in turn is more likely to cooperate with HMRC and comply with the law.

It is intended to remove the scope for fraudsters to steal the VAT due to HMRC, through missing trader fraud (where a supplier will charge and be paid VAT and then ‘go missing’ before declaring it to HMRC); as the reverse charge makes it the customer’s responsibility to account for VAT there is no opportunity for the supplier to disappear without paying the VAT to HMRC. As highlighted by HMRC, this “follows similar measures introduced in response to criminal threats for mobile telephones, computer chips, emissions allowances, gas and electricity, telecommunication services and renewable energy certificates.”

The reverse charge will affect supplies of construction services at the standard or reduced rates that would also need to be reported under the Construction Industry Scheme (CIS), known as ‘specified supplies’.

There is an important difference between CIS and the reverse charge where materials are included within a service. The reverse charge applies to the whole service, whereas CIS payments to net status sub-contractors are apportioned and no deductions are made on the materials content.

The reverse charge does not apply if the service is zero rated for VAT or if the customer is not registered for VAT in the UK.

It also does not apply to some services. These are those supplied to end users or intermediaries connected with end users. Similarly, employment businesses who supply staff and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge.

The HMRC’s guidance on the domestic reverse VAT charge for building and construction services details the complete list of services affected and excluded from the domestic reverse charge.

The domestic reverse charge represents a significant change for VAT accounting in the construction industry. Given the financial and administrative complexities and potential impact on customers, the delay to the implementation date is welcomed by the construction industry, so that they may more aptly prepare their systems and procedures to ensure full compliance is to be achieved. If you wish to understand further how these changes could impact you and your business, please do get in touch.