The reverse charge is a mechanism for accounting for VAT whereby the customer charges themselves VAT, rather than the supplier charging VAT. The domestic reverse charge is commonly used to prevent missing trader fraud i.e. the supplier will charge VAT, be paid the VAT and then ‘go missing’ before they declare it to HMRC. As the reverse charge makes it the customer’s responsibility to account for VAT there is no opportunity for the supplier to disappear without paying the VAT to HMRC.
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What construction transactions does the domestic reverse charge cover?
This domestic reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector.
What are specified construction services?
Specified construction services include:
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations
- construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence
- installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the internal or external surfaces of any building or structure
- services which form an integral part of, or are preparatory to, or are for rendering complete, the services described above including site clearance, earthmoving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
The reverse charge only applies to certain construction services that are subject to the standard rate and reduced rate of VAT. The reverse charge will also apply to goods supplied with those construction services. If a supply contains a mixture of specified and other construction services it will be classed as a single supply of specified services and the domestic reverse charge will apply.
What supplies are excluded?
The following are not included within the definition of construction services:
- drilling for, or extraction of, oil or natural gas
- extraction (whether by underground or surface working) of minerals and tunnelling or
- boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or
- machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- the professional work of architects or surveyors, or of consultants in building,
- engineering, interior or exterior decoration or in the laying-out of landscape
- the making, installation and repair of artistic works, being sculptures, murals and other works which are wholly artistic in nature
- signwriting and erecting, installing and repairing signboards and advertisements
- the installation of seating, blinds and shutters
- the installation of security systems, including burglar alarms, closed circuit television and public address systems.
Additionally, supplies of specified construction services that are not used to make an onward supply of construction services will not need to be reverse charged. This means that the new rules only apply to businesses that are supplying their construction services to another business who will sell on these construction services. It does not apply where the construction services are provided to a consumer of those services (i.e. supplied to a business that has commissioned the construction of a new building). There will also be an exclusion for connected businesses. In these situations normal VAT rules will apply.
When will the domestic reverse charge on specified construction services be introduced?
The domestic reverse charge will be introduced from October 2019.
HMRC have now published draft legislation and asked for comments before 20 July 2018. The final version of the draft order and guidance will be published by October 2018. There is a one year period between the final legislation being published and the date the legislation comes into force. HMRC say that this is to allow small businesses, which are the most heavily impacted, time to adapt to the changes. HMRC will also operate a light touch for genuine mistakes for a 6 month period.
How should building contractors prepare for this change?
Businesses that supply construction services need to understand how they may be impacted by this change. They should be identifying instances where they supply services to other businesses in the construction sector (rather than to a consumer of those services) and if they do operate in this way they need to determine whether the services are included within the list of specified services. Businesses that are caught by this will no longer charge VAT on their services as the recipient will charge themselves VAT.
