As we mentioned in our March briefing a new VAT reverse charge for building and construction services is being introduced. The impact of the coronavirus means that the implementation date has been pushed back until 1 March 2021 having already been postponed due to the impact of Brexit.
HMRC have recently produced updated guidance to explain what the VAT reverse charge is and how it is to apply.
What supplies will be affected by the VAT reverse charge?
As a reminder and as set out in our previous briefing, the reverse charge will only affect supplies of "construction services" supplied at the standard (20%) or reduced (5%) VAT rates where payments are required to be reported through the Construction Industry Scheme (CIS) and where the supply is not excepted or excluded.
If the recipient of the supply is not registered under the CIS regime, or the supply is zero rated the scheme will not apply. Neither will it apply if either the supplier or recipient is not VAT registered.
Are all construction services caught?
The VAT reverse charge applies to "construction services" as we previously discussed, a term that will be familiar as it tracks the definition used in the CIS regime.
However, there are specific exclusions from meaning of "construction services" which include the work of architects, surveyors and other consultants, and operations such as the drilling of gas, extraction of minerals, manufacture of components, equipment or materials, delivery to site and the installation of security systems and CCTV.
Supply only contracts of materials or goods are not caught by the VAT reverse charge regime. However, a supply of materials if it is supplied with other construction services will be treated as a single supply of construction services and so covered by the VAT reverse charge.
What supplies are excepted?
Some supplies of construction services are excepted. So, the reverse charge does not apply where the construction services are supplied to an "end user" or where a supplier is an "intermediary supplier" that is connected or linked to the end user.
In the HMRC guidance end users or intermediaries should provide written confirmation of their end user status or intermediary supplier status to the supplier. If this notification is not provided, the supplier should assume that the reverse charge applies and will therefore not charge VAT. This is a change from the original rules where the supplier had to check the status of the recipient.
There is no set wording for the notification, but this is an example from HMRC's guidance of suitable wording:
"We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge."
Additionally, the reverse charge will not apply to recruitment businesses supplying construction workers. Individual workers are employed or paid by the recruitment business and not by the construction business that uses them to provide construction services.
What happens if I don't notify my end user status?
If an end user does not notify the supplier of its end user status, the supplier will be entitled to assume that the VAT reverse charge applies. This means that it will be for the recipient of the services to account to HMRC for the VAT on the supply.
What happens if the VAT is charged incorrectly?
If a supplier incorrectly charges VAT to the recipient when the reverse charge applies, the recipient will be assessed for the VAT by HMRC. The supplier would then need to return the VAT to the recipient and make the necessary amendments to VAT records and returns.
For suppliers who correctly apply the VAT reverse charge, but the recipient of the services fails to account for tax, HMRC will seek recovery from the recipient, and not from the supplier.
HMRC states in its guidance that it will apply a light touch in dealing with any errors in VAT returns for the first six months of operation as long as the parties are acting in good faith and are trying to comply with the new legislation.
What do I need to do now?
If you are VAT and CIS registered and involved in construction services, you will need to consider whether the VAT reverse charge will apply:
- Check the HMRC guidance to see if any exemptions or exceptions apply
- If you are an end user (or intermediary supplier) you should provide written notification of your end user status to your counter-party. If two parties have already had a reverse charge service between them on a construction site, for convenience, it is possible for both to agree that any subsequent construction supplies on that site can be treated as reverse charge services.
- If you are a supplier, you will need to ensure that your invoicing systems and processes are able to implement the VAT reverse charge as of 1 March 2021. Suppliers will need to set out in the VAT invoice the relevant amount of VAT (so the recipient knows how much VAT to remit to HMRC) and that the reverse charge applies to the supply. There is no set wording, so this could be done by stating, as set out in HMRC guidance by stating:
- Reverse Charge: VAT Act 1994 section 55A applies
- Reverse Charge: s55A VATA 94 applies
- Reverse Charge: Customer to pay the VAT to HMRC
