Construction services will become subject to UK VAT reverse charge from October 2019

Out-Law News | 15 Jun 2018 | 9:58 am | 2 min. read

From 1st October 2019 a VAT reverse charge will apply in the UK to supplies of construction services, meaning 100,000 to 150,000 businesses in the construction and building sectors will have to change their accounting systems. Draft regulations have been published for consultation setting out the details.

The measure will mean that the customer will be liable to account to HMRC for the VAT in respect of supplies of certain construction services, rather than the supplier (the 'reverse charge'). The customer will pay the supplier for the services but will pay the VAT element direct to HMRC.  The reverse charge will apply through the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of construction services. Supplies to the final business customer or to a domestic customer will therefore usually be excluded from the regime, with VAT being charged and accounted for in the normal way. Supplies between group companies will be excluded from the reverse charge.

HM Revenue & Customs (HMRC) says the impact on business administrative burdens is expected to be "significant". It says that one-off costs will include familiarisation with the new rules and adapting VAT accounting systems and processes to enable reverse charge supplies to be calculated and reported. On-going costs are expected to include calculating the reverse charge, keeping records of all reverse charge supplies, checking purchases are correctly treated, and reporting reverse charge supplies on VAT returns.

"This is a major change to how VAT is accounted for in the construction sector. HMRC normally downplays the cost to businesses of changes in the tax regime, but even it accepts these changes will have a significant impact," said Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-law.com

"Although many will be waiting for the final version of the rules in October before making changes to their systems, businesses will need to factor into their budgets the added costs and resources which will be required to implement these new rules," she said.

The reverse charge regime uses a wide definition of 'construction' which includes the  construction, alteration, repair, extension, demolition or dismantling of buildings or structures and infrastructure such as roads, railways and waterways. It also includes painting and decorating. Specified services are excluded, including professional services of architects, surveyors and consultants in building, engineering, interior or exterior decoration or landscaping.

The reverse charge is being introduced in order to remove the opportunity for missing trader fraud in the construction sector. Sub-contractors who provide groups of workers to the construction sector can charge VAT on the service of supplying their workers to other contractors and then fail to pay over to HMRC the VAT they have collected by going missing or committing other types of fraud.

Reverse charge accounting makes it impossible for fraudsters to perpetrate missing trader fraud because the customer rather than the supplier accounts for the VAT direct to HMRC. The government estimates that the measure will raise an average of £100m a year.

Reverse charge provisions have previously been introduced in relation to businesses selling mobile phones and computer chips, the wholesale supply of telecommunications services and the wholesale supply of electricity and gas.

However, the government accepts that the construction sector is much bigger and more complex than other sectors in the UK where reverse charges have been deployed in recent years. It estimates that this measure will affect around 300,000 businesses. For this reason the reverse charge will have a long lead-in time and will not take effect until October 2019.

The government considered introducing a threshold for supplies below which the regime would not apply, but has decided that a threshold would create considerable complexity for businesses and could offer fraudsters a means to avoid the measure. There will therefore be no threshold.

"The measure is yet another example of the government making big businesses play a greater part in the war on tax evasion," said Catherine Robins.

It follows measures such as the introduction of the new corporate criminal offence of failing to prevent the facilitation of tax evasion and the proposed changes to shift the PAYE compliance burden for off payroll contractors to the businesses that use their services.