VAT reverse charge for construction services
- 23 February 2021
- Construction
Following the postponement of the VAT reverse charge commencement date in September 2019 and October 2020, HMRC guidance states that the VAT reverse charge on construction services will now come into force from 1 March 2021. The VAT reverse charge brings major changes in how VAT is handled in the construction industry and construction businesses need to be aware of how the changes will work and what processes they need to put in place to comply with the rules.
The reverse charge will require a recipient (the employer) of specified building and construction services, rather than the supplier (a contractor or sub-contractor or consultant), to account for VAT. The new rule will apply throughout the chain of suppliers, up to the point where the recipient of the services is an end user.
If the recipient is an end user, an intermediary supplier or is not required to report payment under the Construction Industry Scheme (CIS) the normal VAT rules apply.
Supplies of specified building and construction services made after 1 March 2021 will be subject to the reverse charge, even if the underlying agreement was entered into prior to that date. HMRC has published a useful guidance note.
HMRC has introduced the reverse charge to prevent the avoidance of VAT by suppliers who charge and collect VAT on the supply of labour or materials from the recipient but fail to account for that VAT to HMRC. HMRC estimates that its loss of revenue is up to £100 million per annum due to supply chain fraud.
The reverse charge only applies to specified services. The types of services covered by the reverse charge are closely aligned to those defined as construction operations in the CIS. The following (among others) specified services are subject to the reverse charge:
The following services (among others) are not specified services and the reverse charge does not apply:
It should be noted that whilst professional services (such as the work of architects, engineers and surveyors) will not be subject to the reverse charge when supplied on their own, they will be if they form part of a single supply of construction services, for example by a design and build contractor.
An end user is a person or business or groups of businesses who receive the specified services for any purpose other than making an onward supply of those services. The end user is usually the property owner.
An end user is required to inform the supplier that they are an end user and that the supplier should charge VAT in the traditional way. HMRC recommends that the end user provides written confirmation of their status to its suppliers and example wording from HMRC is:
“We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.”
Who is an intermediary supplier?
An intermediary is a recipient who makes onward supplies of construction services without material alteration or further processing. An intermediary can be a landlord or tenant who commission construction services and on-supply those services to the other.
Intermediary suppliers can also include design and build companies that buy building and construction services from various suppliers (such as from surveyors or architects or the supply of scaffolding) and provide these as a single supply to end user clients of the designed and built buildings.
In the same way as end users, intermediary suppliers need to provide written notification to suppliers of their status.
Failure of recipients to notify suppliers (the employer) in writing of their end user or intermediary supplier status will entitle suppliers (a contractor or sub-contractor or consultant) to assume that the reverse charge applies.
Under the new reverse charge rules, VAT invoices will need to include a statement that the VAT reverse charge applies. HMRC’s latest guidance provides further detail on the particular invoicing requirements.
Employers should:
The reverse charge will require a recipient (the employer) of specified building and construction services, rather than the supplier (a contractor or sub-contractor or consultant), to account for VAT.
We can assist in updating appointments and building contracts to address the mechanics around invoicing and accounting for the VAT reverse charge and to clarify the end user status of the employer.
For further advice on the impacts of the VAT reverse charge on your business please contact our construction lawyers.
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Disclaimer
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.