HMRC has announced a five-month delay to the introduction of the VAT reverse charge on construction services, due to the impact of the coronavirus pandemic on the construction sector, and the VAT change will not now apply until 1 March 2021
A domestic reverse charge means the UK customer who gets supplies of construction services must account for the VAT due on these supplies on their VAT return, rather than the UK supplier.
This removes the scope for fraudsters to steal the VAT due to HMRC and 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.
There has been a long lead-in time ahead of the anti-fraud measure coming into force to allow for the potential cash-flow and administrative impacts the change will have on businesses.
A technical consultation on the draft legislation and its impact took place in summer 2018 and the final legislation and guidance were published in November 2018. The domestic reverse charge for building and construction services was originally planned to come into force on 1 October 2019, but this was delayed for a year in response to industry concerns that some businesses were not ready to implement the changes required.
Businesses need to adapt their accounting systems for dealing with VAT and there will be a negative impact on the cash-flows for many affected businesses, as they will no longer get VAT payments from customers for services where the reverse charge applies.
Explanation of the change
To help these businesses overcome the effects that the coronavirus pandemic has had on them and give them more time to prepare, the introduction of the reverse charge has been delayed for a period of 5 months until 1 March 2021.
The intervening period
HMRC remains committed to the introduction of the reverse charge and has put in place a robust compliance strategy for tackling fraud in the construction sector using tried and tested compliance tools.
In the intervening period, HMRC will continue to 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 additional amendment to require end users and intermediary suppliers to notify their sub-contractors of their end user or intermediary supplier status in writing is designed to make sure both parties are clear whether the supply is excluded from the reverse charge. It reflects recommended advice published in HMRC guidance and brings certainty for sub-contractors as to the correct treatment for their supplies. If followed, it will remove a concern that HMRC may seek to challenge the reverse charge treatment where a business that qualified as an end user or intermediary supplier had not given any notification of their status.
In a statement made before HMRC’s latest guidance was published Brian Berry, chief executive of the Federation of Master Builders, said: ‘SME builders are safely returning to work, but important social distancing measures on sites are understandably hampering productivity.
‘That this is having an impact on cashflow means it’s essential that the government delays its introduction of reverse charge VAT by at least one year.
‘This disruptive tax change risks hitting SMEs the hardest at a time when we need to protect jobs and livelihoods.
‘Delaying this policy would acknowledge that SMEs provide the bedrock of the industry and help support the recovery of the construction sector.’
Services affected by the domestic reverse charge
You will have to apply the reverse charge if you supply any of these services:
- constructing, altering, repairing, extending, demolishing or dismantling buildings or structures (whether permanent or not), including offshore installation services
- constructing, altering, repairing, extending, demolishing of any works forming, or planned to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours
- pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the inside or the external surfaces of any building or structure
- services which form an integral part of, or are part of the preparation or completion of the services described above – including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works
Services excluded from the domestic reverse charge
The following services are not subject to the reverse charge:
- drilling for, or extracting, oil or natural gas
- extracting minerals (using underground or surface working) and tunnelling, boring, or construction of underground works, for this purpose
- manufacturing building or engineering components or equipment, materials, plant or machinery, or delivering any of these to site
- manufacturing components for heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems, or delivering any of these to site
- the professional work of architects or surveyors, or of building, engineering, interior or exterior decoration and landscape consultants
- making, installing and repairing art works such as sculptures, murals and other items that are purely artistic
- signwriting and erecting, installing and repairing signboards and advertisements
- installing seating, blinds and shutters
- installing security systems, including burglar alarms, closed circuit television and public address systems
Contact MCL Chartered Accountants today on 01702 593 029 to optimise your tax position or if you need any assistance with VAT reverse charge on construction services.
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Ishan provides financial management, taxation and transactional advice to business entities of all sizes. His expert areas include statutory compliance, business taxation, personal tax & transactional processing and systems. Industry sectors include professional services, retail, hospitality and entertaining & media and advertising services.