Under the new regime, a VAT registered business which supplies certain construction services to another VAT registered business for onward sale will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge.
The recipient must then account for the VAT on that supply itself through its VAT return at the appropriate rate, instead of paying the VAT to the supplier. The recipient may recover the VAT amount as input tax, subject to the normal rules.
The new domestic reverse charge will apply to business to business (B2B) supplies of those services between VAT registered businesses where the recipient then makes an onward supply of the same construction services. The legislation is designed so that if there is a reverse charge element in a supply then the whole supply will be subject to the domestic reverse charge. Examples of construction services where the reverse charge will apply include:
- painting or decorating the external or internal surface of any structure or building;
- installing heating systems, air-conditioning, lighting, power supply, drainage, ventilation, water supply, sanitation and fire protection in any structure or building; and
- the construction, repair, extension, alteration, demolition or dismantling of structures or buildings, whether they are permanent or not.
There are supplies that are excluded from the reverse charge, examples of these include:
- professional work of surveyors, architects or consultants on the building;
- machinery and the delivery of the machinery to the site; and
- installation of security systems, including closed -circuit television and burglar alarms.
The new domestic reverse charge will 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 Government’s original proposal stated that the reverse charge would apply to ‘labour only’ supplies of construction services. However, HMRC now states that it will also cover the provision of construction services that include materials. This will bring many more construction businesses into the reverse charge than first thought.
How will this affect construction businesses?
HMRC acknowledges that the impact on the industry is potentially significant – construction businesses must first adapt their accounting systems to process reverse charge supplies, then make ongoing checks to ensure that supplies and purchases are correctly treated. HMRC also notes that some businesses may suffer a loss of cash flow where VAT is no longer charged, i.e. they will no longer be able to use the VAT they collect from customers as working capital before they pay it over to HMRC.
What action should construction businesses take?
Construction businesses should:
- review supplies made to and received from other VAT registered contractors to establish whether these will be subject to a reverse charge from October 2019;
- consider the adaptions that will need to be made to their accounting systems to deal with the change; and
- consider the impact on their cash flow from October 2019 of not receiving the VAT from their customer and identify any ways to mitigate this impact.
Contact us for further assistance.