A domestic reverse charge will be introduced from 1 March 2021 to tackle VAT fraud in the construction industry. Tony Nickson, VAT Consultant at Hawsons, explains what this will mean for businesses.
What is a reverse charge?
In a nutshell the reverse charge is where the customer charges themselves VAT, rather than the supplier charging VAT. This means there is no opportunity for the supplier to disappear without paying the VAT to HMRC.
When will this come into effect?
This will come into effect on 1 March 2021. It was originally due to come in on 1 October 2019 but was subsequently delayed.
Who will be affected?
Businesses involved in buying or selling specific construction services.
What types of construction services will be covered by the reverse charge?
The domestic reverse charge will only affect supplies at the standard or reduced rates where payments are required to be reported through the Construction Industry Scheme (CIS).
Therefore supplies between subcontractors and contractors, as defined by CIS, will be subject to the reverse charge.
What supplies are excluded from the reverse charge?
It will not apply where:
- Services are applied to the end-user, such as the property owner, or directly to the main contractor who 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’s latest publications state 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 it work?
The introduction of a reverse charge will not change the liability of the supply of the specified services. It will just change the way in which the VAT on those supplies is accounted for- rather than the supplier charging and accounting for the VAT, the recipient of those supplies will account for the VAT. Only supplies made on, or after 1 March 2021 will apply. This will include goods supplied with those services.
What do contractors need to do?
Businesses that supply construction services should identify instances where they supply services to other businesses in the construction sector (rather than to a consumer of those services) and determine whether the services are included within the list of specified service. Businesses that are caught by this will from March 2021 no longer need to charge VAT on these services as the recipient will charge themselves VAT.
Implementation of the reverse charge
HMRC understands the difficulties businesses may have in implementing the domestic reverse charge and will apply a light touch in dealing with related errors that occur in the first 6 months after introduction, where businesses are trying to comply with the new legislation.
However, businesses that knowingly claim end-user status when the domestic reverse charge should have applied will still be liable for the output tax that should have been paid and may be liable for penalties.
How Hawsons can help
If you have any concerns relating to the introduction of the reverse charge or any other aspect of your VAT affairs, please get in touch with Tony Nickson or your usual Hawsons contact.