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Reverse charge VAT for construction services

From 1 October 2019, a major change to the way VAT is collected in the building and construction industry will take effect.

Last week HMRC finally published new guidance on reverse charge VAT for building services, giving those affected less than four months to prepare before it comes into force.

The detailed guidance had been a long time coming for those affected, after the legislation was first drafted in December 2018 following last year's Budget.

Such a fundamental change to the VAT rules in one of the most complex industries seems bound to create disputes after it comes into force in the autumn.

What is the reverse charge?

The domestic reverse charge puts the onus on the customer who receives a service to pay VAT to HMRC, instead of paying it to the supplier.

It will apply to VAT-registered businesses or individuals in the UK who supply specific services under the construction industry scheme.

The legislation will not apply to services that are zero-rated or if the customer is registered for VAT outside of the UK.

It also does not apply to building services that are supplied to what HMRC considers to be end users or intermediaries connected with ‘end users'.

For instance, end users may be a property company that purchases construction services through one member of the company and recharges the services to other group companies, tenants or both.

All the members of the property company and their tenants will be end users, and the reverse charge should not apply.

How to prepare

If you supply services under the construction industry scheme, the Revenue recommends you take these steps to prepare before 1 October 2019.

First, check whether the reverse change affects your sales, purchases or both and make contact with your regular clients or suppliers to inform them of the impending change.

Ensure your accounting software or IT systems are up to date in plenty of time before the change takes effect.

HMRC also urges you to consider if the reverse charge will have an impact on you or your businesses cashflow by updating your forecasts.

Services affected by the reverse charge

The reverse charge for VAT applies if your VAT-registered business supplies constructing, altering, repairing, extending, demolition or dismantling services.

This applies to buildings, structures, walls, roadworks, power lines, electronic communications equipment, aircraft runways, railways, inland waterways, docks and harbours.

For a comprehensive list of services that are affected by the reverse charge for VAT, go to GOV.UK

Critics round on HMRC

The Revenue has been criticised for the way it has implemented the reverse charge, particularly the amount of time it has taken to issue the detailed guidance.

The construction industry had been expecting the guidance to be released 12 months before the change takes effect.

Main contractors with multiple live projects and subcontractors have been the biggest critics, with 15 weeks to review and collate the necessary information.

We can help you prepare for reverse charge VAT.

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