VAT Reverse Charge

What is the Construction Industry Scheme VAT Reverse Charge?

Having been pulled at the eleventh hour in 2019 because businesses were not prepared for its introduction, HMRC revived the construction industry VAT reverse charge for a second go last year before it was again scuppered, this time by Covid. 

However, its introduction could be delayed no longer, so VAT reverse charges will take effect from today, Monday 1 March 2021.

What is the VAT Reverse Charge??

It is essentially a measure to prevent sub-contractors in the construction industry charging and collecting VAT but not paying it over to HMRC.  This has been identified as a significant risk area by HMRC, who have therefore added certain sub-contract construction services to the list of supplies that are now to be taxed by the recipient not the supplier. 

The mechanism is simple.  Where supplies fall under the VAT reverse charge measure, the supplier will not charge VAT on its invoice, but the recipient of the supply will self-charge the VAT at the relevant rate, usually 20% but 5% if a reduced-rate supply.  Zero-rated supplies are not covered. 

The self-charged VAT is recoverable by the recipient to the extent that the services on which the VAT is self-charged are attributable to the recipient’s taxable activities.  If the services are wholly attributable to taxable activities, there will be no VAT to pay because the input VAT claimable will cancel out the output VAT payable.  If the services only relate partially to taxable activities, only a proportion of the VAT will be recoverable, so there will be a partial cost to the recipient.  If the services are wholly attributable to exempt or non-business activities, the whole of the reverse-charged VAT will represent a cost. 

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Who does the VAT Reverse Charge  apply to? 

The measure only applies when all of the following conditions apply: 

• The services are provided to a business that is VAT registered (or liable to be VAT registered) 

• The recipient of the services is registered for the Construction Industry Scheme (CIS) 
• The services fall within the scope of the CIS 
• The recipient of the services is not an ‘end-user’ or ‘intermediary supplier’ 

An ‘end-user’ is a business that buys the services for a purpose other than to make onward supplies of construction services and an ‘intermediary supplier’ is a business that is connected to the end-user, e.g. by being in the same corporate group as the end-user, or by intermediary and end-user both having an interest in the land or building in question (such as landlord/tenant relationship). 

So, a main contractor buying services in from a sub-contractor will not be an end-user, so the VAT reverse charge will apply to the services bought in if the other conditions are met; a landlord buying services in to renovate its investment properties will be an end-user, so VAT should be charged as normal on services supplied to the landlord. 

Many subcontractors are notifying their clients that unless notified otherwise, they will assume the client is an end-user or an intermediary and will therefore continue to charge VAT (i.e. not apply the VAT reverse charge rules). 

It is therefore essential for businesses who are not buying in construction services as an end-user or intermediary to notify their suppliers as soon as possible, so that they do not get charged VAT.  Although it is likely that HMRC will initially adopt a relatively soft touch in relation to the implementation of the new scheme, it is possible that they may not allow businesses to recover VAT that has been incorrectly charged, so there is an inherent risk in accepting and paying a VAT charge that is not appropriate.  

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Key Points for Suppliers 

• Only stop charging VAT where you are sure that the services qualify for the VAT reverse charge 
• Where your services potentially qualify for the VAT reverse charge, obtain your customer’s VAT registration number (also check its validity) and obtain a written declaration from them that they are not an end-user or an intermediary  
• Where your services are subject to the VAT reverse charge, make sure this is stated on your invoice, and that the amount of VAT that your customer needs to reverse charge is also shown on your invoice. 

Key Points for Customers 

• Only accept a VAT charge if you are sure you are an end user or an intermediary in relation to the services being supplied 
• If you are not an end user or an intermediary, provide a statement to this effect to the supplier, so that they don’t add VAT to their invoice.  HMRC may not allow recovery of VAT incorrectly paid. 

ETC Tax specialises in VAT advice, advising property developers and investors on VAT and other tax matters.  If you have any questions regarding the Construction Industry VAT Reverse Charge, please get in touch with our VAT Director, Keith Miller at keith.miller@etctax.co.uk or on 07423 633120.