Time to prepare (once again) for the VAT reverse charge

In just a few months, more than 150,000 businesses connected to the construction industry will have to make a fundamental change to how they manage their VAT affairs.

Although the world has been in lockdown, and with it, parts of the construction sector, the Government still intends to launch the VAT domestic reverse charge for specified types of construction work from 1 March 2021. This is the third launch date for the scheme, with two previous launches having been postponed.

The reverse charge is designed to prevent missing trader fraud, which is estimated to cause £100 million to be lost a year in VAT payments.

This fraud is most commonly found among sub-contractors who provide services to developers or large contractors working in the construction industry.

As a group, sub-contractors typically have minimal VAT costs to recover, with their workers’ wages representing their main outgoing, which is not subject to VAT.

However, they are required to charge VAT on the service of supplying their workers, which has led to some unscrupulous sub-contractors attempting to evade VAT by ‘going missing’.

They typically achieve this by not filing accounts and dissolving a company, only to reappear sometime later under a new company registration.

The reverse charge applies to business-to-business supplies in circumstances where both businesses are registered for VAT, there is an onward supply of construction and the parties are subject to the Construction Industry Scheme (CIS).

Under the VAT reverse charge, the responsibility of accounting for VAT falls on the recipient (other than the end-user) of construction services, or goods related to construction, instead of paying it to the supplier of the service, which may be a sub-contractor.

They can then recover the VAT, subject to the normal rules of recovery, as input tax. The amount would still be treated as input tax on the same VAT return and, assuming that it was using the services in making taxable supplies itself, it would be able to recover it in full.

The reverse charge does not apply where:

  • Services are supplied to the end-user, such as the property owner, or directly to a main contractor that sells a newly completed building to the customer;
  • The recipient makes onward supplies of those construction services to a connected company;
  • The supplier and recipient are landlord and tenant or vice versa; or
  • The supplies are zero-rated.

The reverse charge will only apply to the supply of specific construction services, details of these can be found by clicking here. The reverse charge will also apply both to labour and materials related to the services used.

To prepare for these changes, businesses should:

  • make sure their accounting systems and software can deal with the reverse charge
  • consider whether the change will impact their cash flow
  • make sure all staff who are responsible for VAT accounting are familiar with the reverse charge and how it works.

The rules surrounding the VAT reverse charge are nuanced and they may be applied differently depending on the nature of a business and its place within the supply chain, so you must seek help if you are unsure of your position after 1 March 2021.

Link: The VAT Reverse Charge