VAT reverse charge for construction and building services
This reverse charge measure is coming in to effect on 01/03/21. A Revenue and Customs Brief was issued in June 2020, giving more information.
Every VAT registered construction business should have received an individual letter in January 2021 (further to letters sent in February and September 2020), advising them to check if they might be liable for the reverse charge. If they are liable, they should start to prepare now.
Essentially this new rule will result in a contractor no longer paying VAT over to their sub-contractor and instead pay it directly to HMRC via their own VAT return.
Aim of Domestic Reverse Charge
To reduce VAT fraud in the construction industry, so preventing builders from charging VAT and not paying it to HMRC. It was announced as part of the 2017 budget to combat what HMRC estimates to be £100m of revenue lost through trader fraud.
The key aspects are:
- it will apply to standard and reduced-rated supplies of building and construction services made to VAT registered businesses, who in turn also make onward supplies of those building and construction services
- the contractor will be responsible for paying the output VAT due rather than the sub-contractor, and can continue to reclaim this amount as input tax
- the scope of supplies affected is closely aligned to the supplies required to be reported under the Construction Industry Scheme, but does not include supplies of staff or workers for use by the customer
- the legislation introduces the concept of ‘end users’ and ‘intermediary suppliers’ – this covers businesses or groups of associated businesses that do not make supplies of building and construction services to third parties and as such are excluded from the scope of the reverse charge if they receive such supplies, examples include landlords, tenants and property developers
Further guidance from HMRC is here – https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services#determining-reverse-charge-treatment-of-existing-contracts-to-be-ready-for-1-october-2019