Reverse Charge VAT in the Construction Sector postponed

United Kingdom

Earlier this month, HMRC announced that the introduction of domestic reverse charge VAT for construction services would be postponed from 1 October 2019 to 1 October 2020 to allow the construction industry greater time to prepare for the change. We provide a short briefing note on the topic below.

What is reverse charge VAT?

The Government announced its intention to introduce a domestic reverse charge VAT for construction services (the “Reverse Charge”) in its 2017 Autumn Budget in response to an increased number of fraudulent VAT claims in the construction industry. The intention to introduce the Reverse Charge was confirmed in this year’s Autumn Budget but has sparked significant debate about the construction industry’s readiness for such a significant change.

The Reverse Charge means that companies in the construction supply chain will no longer receive a 20% VAT payment on their bills but instead the UK customer receiving the construction services must account for the VAT due. This means that a VAT registered business which receives supplies of construction services will have to account for the reverse charge on its own VAT return.

How will the Reverse Charge apply?

The Reverse Charge will apply to supplies of specified services within the UK which are reported under the Construction Industry Scheme (CIS). The CIS covers most construction work to a permanent or temporary building or structure and civil engineering works like roads and bridges.  It includes construction works like preparing a site, demolition or dismantling, building works, alternations, repairs and decorating, installing heating, lighting, power, water and ventilation systems, as well as cleaning the inside of buildings after construction work.

The Reverse Charge will not apply to architecture or surveying services, scaffolding hire (where labour is not included), carpet fitting, plant and machinery manufacturing, delivering materials or works on a construction site which are clearly not construction operations i.e. running a canteen for construction workers.

What are the implications for the construction industry?

There have been a number of concerns raised by the construction industry in relation to the Reverse Charge including the potential impact it will have on cash-flow and the administrative changes required to implement it.

Businesses will need to adapt their accounting systems for dealing with VAT and there may be a negative impact on cash-flow for many affected businesses, as they will no longer get VAT payments from customers where the Reverse Charge applies.

What is happening now?

Due to the concerns noted above the original implementation date has been delayed from 1 October 2019 until October 2020. The aim of the postponement is to give businesses more time to prepare.

To ensure that businesses are in a position to deal with the upcoming change the following steps should be considered:

  • check whether the Reverse Charge affects either your sales and / or purchases;
  • make sure your accounting systems and software are updated to deal with the Reverse Charge;
  • consider whether the change will have an impact on your cash flow and consider how best to manage the change;
  • make sure all your staff responsible for VAT accounting are familiar with the Reverse Charge and how it will operate;
  • review each of your existing construction contracts to determine how the Reverse Charge will change existing invoicing and payment arrangements; seek to confirm these with your contractual counter-party and take legal and/or accounting advice if necessary.