VAT Reverse Charge for Construction Services
To tackle VAT fraud in the construction industry a domestic reverse charge will be introduced with effect from October 2019. This means that the buyer will be responsible for bringing VAT to account rather than the supplier. HMRC have issued a consultation on the draft statutory instrument.
The implementation of this legislation is to remove the opportunity for missing trader fraud within the construction industry that has been steadily increasing over the past few years. This measure specifically tackles the supply of construction services between construction businesses.
What supplies does the reverse charge apply to?
The domestic reverse charge only applies on specified supplies of construction services between businesses and not supplies made to consumers. This is because the legislation is designed to prevent missing trader fraud which can only be perpetrated by businesses.
Under the new law, specified supplies subject to either the standard rate or reduced rate will be subject to the domestic reverse charge. The reverse charge will also apply to goods supplied with specified services.
What are specified construction services?
Specified construction services are determined based on the definition of ‘construction operations’ used in the Construction Industry Scheme (CIS) under section 74 of the Finance Act 2004. These are:
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
- construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines etc.
- installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- 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 internal or external surfaces of any building or structure
- operations which form an integral part of, or are preparatory to, or are for rendering complete, such operations as are previously described in this subsection, including site clearance, earth-moving, excavation, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
If a supply contains a mixture of specified and other construction services it will be classed as a single supply of specified services and the domestic reverse charge will apply.
What supplies are excluded?
The new rules only capture supplies between construction businesses and therefore purchasers of construction services that are not making an onward supply of construction services (for example, they are commissioning the services to build an office) will not be impacted. Additionally, there will be an exclusion for connected businesses. The normal VAT rules will apply where a scenario is excluded from the new rules.
HMRC will issue official guidance once the final legislation is finalised. There is a one year period between the final legislation being published and the date the legislation comes into force. HMRC say that this is to allow small businesses, which are the most heavily impacted, time to adapt to the changes. HMRC will also operate a light touch for genuine mistakes for a 6 month period.
If you require any assistance or advice in preparation for the changes please contact our VAT partner Alison Birch below.