Domestic VAT Reverse Charge for the Construction Industry

A VAT 'reverse charge', to be introduced in the UK for building and construction services, is designed to combat VAT fraud in the building and construction sector. It will have significant impact on VAT compliance and cashflow. Its introduction has been delayed until 1 March 2021 due to the coronavirus pandemic.

• Suppliers of goods or services will no longer be involved in the payment of VAT to HMRC. The liability for VAT payment will now be with the VAT registered customer.

“The greatest impact is likely to be on cashflow. When applying the reverse charge, construction businesses will have to wait to recover the VAT via their VAT returns. This creates a delay that will hit working capital, which is so often the lifeblood of construction businesses.”
“Then there is the increased admin burden and decisions that need to be made by both suppliers and customers. When acting as the supplier of construction services, for each job you will need to consider the type of work, if the sale is to an end user or third party, and whether they are VAT registered. This will create a lot more admin time for suppliers.”
“For the customer purchasing construction services, they will need to check that they have been charged VAT correctly, or account for the VAT due accordingly. Incorrectly charged VAT is not recoverable and penalties may also be issued for incorrectly accepting VAT invoices. In my experience contractors tend to act cautiously to do the right thing, but it is important that they review and query any purchases that shouldn’t incur the reverse charge, such as zero-rated work e.g new build projects.”
“There are a whole host of considerations that will need to be made, from how to deal with customers that apply CIS, whether terms and conditions, PO’s and work orders need to be amended or reviewed by a professional, and how to assess the correct VAT treatment of purchases. You will also need to decide how you will keep evidence to support the day-to-day decision you are making to minimise the risk of HMRC penalties.”

• The customer must declare the VAT due as output tax on their own VAT return and reclaim it subject to normal rules via the reverse charge mechanism (though supplies to the final customer are excluded, see further exclusions below).

“Ultimately, it will be important that customers communicate with suppliers during the tendering and contracting process to ensure the correct VAT treatment.”
“The VAT reverse charge isn’t something that can just be passed to your accountant or tax advisor to deal with. It spans both accounting and your own internal processes, so you will need to work together to plan the changes and then communicate with your team.”
“Now that the rollout has been delayed for a second time, and assuming there is no further extension, it is important that firms revisit this again at the beginning of 2021 to ensure they are ready for the launch in March. As mentioned above, there may be a great deal of planning and process changes needed to be ready.” comments Nicola.