In an effort to tackle VAT fraud in the construction industry, a domestic reverse charge will come into effect in October 2020. This means that buyers will become responsible for applying VAT to an account rather than the supplier. To assist with the roll-out, HMRC have issued a consultation.
The aim of the new legislation is to eliminate any opportunities for missing trader fraud in an industry that has seen instances of this steadily increase in recent years. Reverse VAT specifically targets the provision of construction services between construction organisations.
Where Does The Reverse Charge Apply?
The new reverse charge will only apply on specified supplies of B2B construction services and won't apply to supplies for consumers. This is because the legislation is intended to eliminate missing trader fraud, which can only be committed by companies. Under this new legislation, the specified supplies which are subject to either the standard or reduced rate will incur the domestic reverse charge. This will also be applied to goods that are supplied within the services.
What Are The Specified Construction Services?
The services are determined based on definitions of 'construction operations' included in the Construction Industry Scheme (CIS). This is under section 74 of the Finance Act 2004, and includes:
Installations in any structure of systems of lighting, heating, air-con, power supply, ventilation, sanitation, drainage, water supply and fire protection.
Construction, repair, alteration, extension, dismantling and demolition of structures, including offshore installations.
Construction, repair, alteration, extension or demolition of any works on part of the land, including walls, power-lines, roadworks, etc.
Internal cleaning of structures carried out during construction, extension, repair, alteration or restoration.
Painting/decorating of interiors.
Operations forming an integral part of/preparing/completing operations including earth-moving/excavation, site clearance, tunnelling, laying foundations, erection of scaffolding, landscaping, site restoration and the creation of access works.
Any supply that contains a mix of these specified services will be classed as a single supply, and subject to the domestic reverse charge.
The impact on trades in the building industry will be significant. Suppliers will need to identify customers liable to account for the RC by checking VAT registration numbers and obtaining evidence that a customer is an ’end user’ or not – this helps VAT, if due, to be invoiced correctly.
There is an equal challenge for VAT-registered end users that may not be aware of the need to provide evidence of their end-user status. It is now clear that there won’t be a legally enforceable certification process. So, whilst the legislation says that if a supply of RC services is made to an end user, VAT should be charged by the supplier, the guidance states that if a customer fails to confirm end user status then the supplier does not charge VAT and the customer will be liable for both the output VAT and input VAT obligations under the RC. There appears to be no statutory basis for this, and it is not clear what would happen in the event of a dispute.
Understanding Your Requirements
HMRC will issue its official guidance once the legislation is finalised and comes into force. There will be a 1-year period between the publishing of the final legislation and it coming into force. HMRC say that this will enable small businesses, who will be impacted most heavily, to adapt to the changes adequately. HMRC will also undertake a 'light touch' policy for any genuine mistakes for a period of 6 months.
If you require any advice or assistance in preparing for these changes, please contact David Howard and we'll answer your questions.