VAT reverse charge for construction services

The issue

A reverse charge for construction work will be introduced on 1 October 2019. This is an anti-fraud measure under which building contractors will not pay VAT to their subcontractors, but will account for any VAT on the supply by means of a reverse charge. The aim here is to deny a subcontractor the opportunity to collect VAT which is not paid over to HMRC.

The reverse charge is aimed at supplies by subcontractors to contractors, and not at supplies by contractors to a final customer (an End User), such as an occupier. End Users are those who receive construction services but do not supply them on.

The reverse charge will only affect supplies at the standard (20%) or reduced (5%) rates where payments are required to be reported through the Construction Industry Scheme (CIS). Unlike CIS the reverse charge will also extend to building materials included within a supply of building work.  The reverse charge will also only apply to supplies between UK taxable persons; i.e. both parties have to be registered or liable to be registered.

 

How does the VAT accounting work?

Main  contractor

Under the reverse charge procedure the contractor will:

  • Account for the VAT on the subcontractors services as output tax in box 1 of the VAT return; and
  • Treat the same amount as input tax to be reclaimed in box 4 on the same return (subject to the normal rules).

Input tax will normally be recoverable in full and therefore the transaction has a nil net tax effect for the main contractor.

Subcontractor

Invoices issued by subcontractors to which the reverse charge applies must show all the information that is normally required to be shown on a VAT invoice (but no VAT charged) and the invoice must be noted that the reverse charge applies and the customer is to account for VAT.

HMRC are currently also stating that the reverse charge VAT amount due should be shown on the invoice (but not charged as such). HMRC have not yet commented on the fact that many subcontractors do not issue VAT invoices, but it is assumed that they will expect similar information to be included on any requests for payment which are issued.

 

Final comment

It is likely that many subcontractors will consequently become repayment traders as they will recover VAT on materials etc. but will not be required to declare output tax.

There is also a potential concern for subcontractors using the flat rate scheme (FRS) as VAT due is calculated on total turnover and we await HMRC commentary on this.

This measure does seem rather untrusting and discriminatory to subcontractors as there is an underlying assumption that they cannot be trusted to truthfully state their VAT position. However this approach is consistent with the rest of the construction industry scheme where subcontractors are not trusted to self-assess their own tax.

 

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