Mark Whiteside explains the new rules and how to prepare for them.
From 1 March 2021 the construction sector is subject to new VAT reverse charge rules, which represent a material and complex change. HMRC has acknowledged that the impact of the rules will be significant. In the first six months a “light touch” will be applied to compliance (but only for genuine mistakes).
What is VAT reverse charge?
VAT reverse charge is a mechanism designed to prevent the avoidance of VAT. Normally, the recipient of a supply will pay an agreed price plus VAT, and the supplier will account for that VAT to HMRC. Under VAT reverse charge the recipient will pay the agreed price to the supplier but will account for the VAT directly to HMRC.
When do the new rules apply?
The new VAT reverse charge rules will apply, broadly speaking, where there is a “business to business” supply of construction services that falls within the existing Construction Industry Scheme rules, ie where:
1. a VAT-registered business supplies construction services;
2. the recipient is VAT registered;
3. the recipient is not an “end user” (see below); and
4. the services are subject to VAT at 20% or 5%.
What construction services are caught?
Helpfully, the new rules follow existing CIS definitions, so the following are subject to the VAT reverse charge: constructing, altering, repairing, extending, demolishing and dismantling buildings, structures and works forming part of the land (such as walls, roads and power lines); installing heating, lighting, air conditioning and drainage, or painting or decorating outside or inside; preparatory work such as cleaning, site clearance, earth-moving, excavation, laying foundations and erecting scaffolding.
So, if the supplier’s construction services fall within the CIS rules (even where payments can be made without CIS deductions) the new VAT reverse charge rules apply.
How do the rules apply to goods?
The sale or hire of goods does not fall within the CIS and therefore will not be subject to the VAT reverse charge rules.
However, if goods are supplied along with construction services (as part of a single supply of services) then the new rules will apply.
For example, a “supply and fix” contract involves a supply of goods and services. If the supply falls within the CIS then the VAT reverse charge rules will apply to the full amount charged. This is the case regardless of whether separate contracts are used and regardless of how invoices are broken down.
What about mixed supplies of services?
When looked at separately, some elements of a single supply might be subject to the VAT reverse charge and some might not. In that scenario, the whole supply would be caught. There is, however, an important concession if the value of the VAT reverse charge element accounts for 5% or less of the total contract value (in which case it can be disregarded, and normal VAT rules will apply).
Are there any exclusions?
Certain construction services are excluded from the scope of the VAT reverse charge, in particular: oil, gas and mineral extraction, manufacture of components, professional services of architects, surveyors or consultants, artistic works, signage and installation of security systems.
A supply of staff, rather than construction services, will not be subject to VAT reverse charge. It will be important to understand which party is responsible for supervising and controlling the individual. If the recipient is responsible for supervision and control then there is likely to be a supply of staff only, which will not constitute a supply of construction services.
Who is an ‘end-user’?
The VAT reverse charge rules do not apply to supplies of construction services made to an “end user”. The aim of the rules is to place the VAT accounting obligation on the final construction business in a supply chain. An end user is the consumer or final customer of the construction services.
A difficult question will be in relation to property developers. Normally a developer will be making an onward supply of property, and not an onward supply of construction services, in which case the developer will be an end user. However, the developer may instead agree to sell land, or a part completed building, plus separate construction services to complete that building. In that case the developer will not be an end user and may be subject to VAT reverse charge rules.
“Intermediaries” are treated in the same way as “end users” and are not subject to the VAT reverse charge. An intermediary is a recipient who makes an onward supply of the same construction services (without material alteration), but only if the intermediary is connected with the end user (for example a group company), or if the onward supply is in relation to land or buildings in which both parties have an interest (for example between a landlord and tenant).
Administration and contracts
The supplier must include all of the usual information on a VAT invoice, including the amount of VAT due (although the supplier should not show this as VAT charged). The supplier should make it clear that VAT reverse charge applies and that the recipient is required to account for the VAT.
Contracts should specify whether the VAT reverse charge applies. An end user (or intermediary) should confirm its status in the contract, so that the normal VAT rules apply. Any change in status should be notified to the supplier.
Actions to take
- Review all supplies made to, and received from, other construction businesses to ascertain whether the new VAT reverse charge rules will apply.
- Consider changes to VAT invoicing and VAT accounting systems (for example, to automatically perform status checks on recipients of construction supplies).
- Consider deposits or retentions for VAT if there are doubts about whether the new VAT reverse charge rules apply.
- Consider the cash flow impact (some businesses may become VAT repayment traders, in which case monthly rather than quarterly VAT returns would improve cash flow).
- Review all construction contracts, for example to ensure recipients confirm end user or intermediary status.
Mark Whiteside is a partner at Brabners
