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16 September 2019
Significant changes to the way VAT is charged on construction services that were due to be implemented in October 2019 have been delayed for a year.
As well as affecting many construction businesses, these changes will also impact some organisations in the fire industry sector.
HMRC said that industry representatives had raised concerns that some businesses would not ready to implement the VAT domestic reverse charge for building and construction and a decision was made to delay until October 2020, giving the industry more time to prepare. This delay would also avoid the changes coinciding with Brexit.
HMRC believes that £100m of revenue is lost each year as a result of ‘missing-trader’ fraud, where construction businesses charge VAT to their customers and then disappear before paying it over to HMRC. In order to combat this type of fraud, new ‘reverse charge’ rules will come into force which will have a widespread impact on the construction sector.
Domestic reverse charge
A domestic reverse charge means the UK customer who receives supplies of construction services must account for the VAT due on these supplies on their VAT return rather than the UK supplier.
HMRC says that this removes the scope for fraudsters to steal the VAT 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.
Under the new rules, businesses supplying construction services must not charge VAT where their customer is registered for VAT and will use the services to make an onward supply of construction services.
Instead, main contractors will effectively charge themselves VAT on subcontractors’ services, and pay the VAT sums that would have been paid to the subcontractor direct to HMRC in their VAT returns.
From 1 October 2020, subcontractors will need to issue domestic reverse charge VAT invoices to main contractors, reverse VAT rules apply and that the customer must account for the VAT.
The definition of ‘construction services’ is very broad and reflects the definitions used for the Construction Industry Scheme (CIS).
There are some exclusions, including the installation of seating, blinds, shutters and security systems. Professional services of architects, surveyors and consultants are also excluded. However, where excluded services are supplied as a package with other services which are within the new rules, the whole package will be subject to the reverse charge.
What contractors need to do
If you’re a contractor you will need to review all your contracts with sub-contractors to decide if the reverse charge will apply to the services you receive under your contracts. You’ll need to notify your suppliers if it will.
What sub-contractors need to do
If you’re a sub-contractor you’ll also need to contact your customers to get confirmation from them if the reverse charge will apply, including confirming if the customer is an end user or intermediary supplier.
For more information visit the HMRC website.
Domestic reverse VAT charge for building and construction services guidance
Revenue and Customs Brief 10 (2019): domestic reverse charge VAT for construction services - delay in implementation
09 April 2021
04 March 2021
24 October 2019