From 1 October 2020 there will be a significant change to how suppliers in the construction industry supply chain account for VAT. The changes will apply to businesses making or receiving specified services that are reported under the Construction Industry Scheme (CIS).
Why the Change?
The change in legislation is an anti-fraud measure designed to counter “missing trader” fraud – a practice where parties in the construction supply chain charge VAT to customers and then ‘disappear’ without remitting the VAT collected to HMRC. HMRC estimate that the losses in unpaid VAT from the construction industry is around £100m per annum and have introduced similar fraud-prevention measures in respect of supplies of mobile phones and wholesale gas and electricity in recent years with significant success.
What is a Reverse Charge?
The reverse charge does not change the VAT liability, but instead changes the way in which VAT is accounted for. A reverse charge effectively shifts the VAT accounting obligations in respect of a supply from the supplier (as is conventional in most circumstances) to the recipient, who must account for output VAT on the supply received and, simultaneously, recover some or all of this to the extent allowed. In the case of a business which is entitled to recover all the VAT it is charged, the reverse charge mechanism should not create a VAT cost, however there are many other considerations that the new measures create for businesses, which are explored briefly below. This is particularly pressing given that the introduction of the domestic reverse charge coincides with the new obligations established by Making Tax Digital for VAT.
When does the Reverse Charge Apply?
In general terms, every supply in a supply chain, except those to its “end user” will be subject to the reverse charge where the supplies utilised involve work to the fabric of a building; including site preparation, demolition and clearance, new build work, alterations, repairs, installing means of light, heat and power and clean-up works following developments (together: “specified services”). Any goods supplied with these services will also be subject to the reverse charge, however supplies of (for example) architectural services, the delivery of materials and so on will not.
End Users in a Supply Chain
Supplies to the ‘end user’ in a supply chain will not be subject to the reverse charge and will instead be subject to VAT at the appropriate rate. An ‘end user is’ a recipient of specified construction services who uses those services for any purpose other than making further supplies of specified services (i.e. subcontracting), and who would include, for example, someone receiving services to their own premises or a developer whose supplies are of completed properties rather than of construction services. End users must provide a declaration to their suppliers which clearly states their position as such and permits the charging of VAT, without which the reverse charge applies. This change is unusual in the VAT process, as in other situations such certification is usually to avoid being charged VAT, not to ensure it.
The new rules do not apply to contractors dealing directly with non-VAT registered customers and for contracts that are zero rated such as building new dwellings.
Impact on Businesses
These changes (amongst others) will require construction businesses to:
Time to Take Action
With HMRC confirming that they will penalise non-compliance, it is crucial that any businesses who think they will be affected by these changes act now and ensure they understand the impact they will have and the obligations they create. We are happy to speak to all affected businesses in order to advise on specific circumstances and to provide bespoke guidance.
Armstrong Watson has a dedicated VAT team with a combination of Big4 practice, HMRC and in-house backgrounds, making us ideally placed to advise on the impact of the changes in a holistic way.