HMRC has announced a further 5 month delay to the introduction of the VAT domestic reverse charge for building and construction services. This is due to the impact of the coronavirus pandemic on the construction sector and the reverse charge will now be introduced on 1 March 2021.
In addition, there will be an amendment to the original legislation, which was laid in April 2019. For businesses who are end users or intermediary suppliers to be excluded from the reverse charge, they will now be required to inform their sub-contractors in writing that they are end users or intermediary suppliers.
The reverse charge represents part of a government clamp-down on VAT fraud. According to the government, large amounts of VAT are lost through ‘missing trader’ fraud. As part of missing trader fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. The construction industry is considered a particularly high-risk sector.
It is a business to business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this as the ‘end-user’.
The reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the sub-contractor supplying the services.
The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.
The scheme is expected to operate as follows:
A VAT-registered business, receiving a supply of specified services from another VAT-registered business, for onward sale, on or after 1 March 2021:
- should account for the output VAT on supplies received through its VAT return
- does not pay the output VAT to its supplier on supplies received from them
- can reclaim the VAT on supplies received as input tax, subject to normal VAT rules
The supplier should issue a VAT invoice indicating the supplies are subject to the reverse charge. An end-user should notify its end-user status, so the supplier can charge VAT in the usual way.
The charge was originally due to come into effect on 1 October 2019 but was delayed due to fears that businesses in the construction sector were not ready. HMRC says it remains ‘committed to the introduction of the reverse charge’, and has put a robust compliance strategy into place in order to tackle fraud in the construction sector.