New VAT reverse charge on construction services coming into force on 1 October 2019

Some supplies of construction services (and related goods) made on or after 1 October 2019 will have to comply with a new VAT reverse charge. This will have a potentially very significant impact on contractors in this sector.

The new regime targets business-to-business supplies of construction services between taxable persons (i.e. those VAT registered or required to be registered). It is designed to counter perceived fraud in the construction industry, in scenarios where the supplier of construction services collects VAT from its customers but does not account to HMRC for it. Where the regime applies, the recipient of the services must account to HMRC under a reverse charge mechanism – effectively, the customer includes both output and input VAT in its own VAT return.

There are some important exceptions to the regime, most notably:

• a supply to an “end user” is outside the scope of the regime (for these purposes, an “end user” is someone who uses the construction services for any reason other than making further supplies of construction services, so this will exempt e.g. property owners and retailers, from the scope of the new regime); and
• zero-rated supplies of services (or related goods) are not within the scope of this reverse charge mechanism.

Although generally the effect will be to put the VAT liability for a supply on its recipient, suppliers will still need to be alert to liability from non-compliance, checking the recipient’s VAT registration status and knowing when and how to apply the reverse charge in practice. The devil here will of course be in the detail, for example in separating the elements of “mixed” supplies provided as one package (broadly speaking unless all these elements are excepted supplies, the reverse charge will still bite). Suppliers should check that:

• their staff are trained to be able to spot reverse charge scenarios and, if applicable, the availability of any exceptions;
• their invoicing and accounting procedures can cope with this new mechanism if it applies (e.g. issuing VAT invoices making it clear that the reverse charge applies and that the customer must account to HMRC for the VAT); and
• construction contracts are drafted so as to be able to deal with the new regime (e.g. including confirmations as to the customer accounting for VAT rather than paying it to the suppliers or the wording on which (if any) exceptions apply etc.).

HMRC have provided detailed guidance on the new regime, to be found here. It acknowledges that the new regime does create significant additional work for the construction industry, and has said that it will adopt a “light-touch” approach to enforcement between October 2019 and 1 April 2020.

If you have any specific queries as to the regime, please contact Tim Waters in our tax team.