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Construction sector reverse charge on its way

  • 15th January 2021

The government announced back in 2019 their intent to pursue legislation to shift responsibility for paying VAT along the supply chain with the introduction of a domestic VAT reverse charge for supplies of construction services. This was deferred twice, but is now due to come into force on 1 March 2021.

Currently, large amounts of VAT are lost through ‘missing trader’ fraud. This is where VAT is charged by a supplier, who then disappears, along with the output tax. Construction is considered as a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax.

So if you trade as a builder, you will no longer charge the VAT on invoices you issue to other VAT registered construction industry customers (unless these are ‘end users’). Instead the customer will declare the VAT on their own returns and claim input tax.

What does Domestic Reverse Charge mean?

Under the domestic reverse charge (DRC) a VAT-registered business that supplies certain construction or building services to another VAT-registered business for onward sale is required to issue an invoice stating that the service is subject to the domestic reverse charge. The recipient/customer must then account for the VAT due on that supply via its VAT return at the appropriate rate, instead of paying the VAT to the supplier. The recipient may recover that VAT amount as input tax, subject to the normal rules – this would normally mean a nil net tax position with no VAT being due to HMRC.

The good news for smaller businesses is that the value of reverse charge services received will not count towards the VAT registration threshold for the customer. The guidance also confirms that if there has already been a DRC supply on a construction site, any subsequent supplies on that site between the same parties can be treated as DRC supplies if both parties agree.

The legislation stipulates that if there is a reverse charge element in a supply then the whole supply will be subject to reverse charge (unless the value of the DRC element is 5% or less of the value of the whole supply, in which case it can be disregarded) . It will also cover the provision of construction services that include materials. Therefore, the impact of this change is wide.

It will be important for businesses to check that the software they have will be able to cope with the reverse charge for construction services. Invoices under this reverse charge procedure will require a statement which identifies the supply as reverse chargeable.

The HMRC guidance states that the invoice should clearly state the amount of VAT due under the reverse charge, but “should not be included in the amount shown as total VAT charged” – this could lead to confusion when invoices are posted.

The new reverse charge rules will have a significant effect on VAT compliance and cashflow. We therefore strongly recommend planning to accommodate this well before the 1 March 2021 deadline.

If you would like to discuss the impacts of this change on your business, then please contact one of our experts straight away.

Any news or resources within this section should not be relied upon with regards to figures or data referred to as legislative and policy changes may have occurred.