VAT in the Construction Industry – Inverse Charging – Further Delays
On 5th June 2020 HMRC announced a further 5 month delay to the implementation of inverse charging for VAT in relation to construction industry type services. The measures were originally announced in 2018 and scheduled to be implemented from 1st October 2019. In September 2019 a delay was announced to 1st October 2020 and this has now been extended to 1st March 2021. The reason given is to allow businesses to deal with the impact of the Coronavirus pandemic. It is possible that there will be further delays, but businesses would be advised to prepare as if there will not be.
Recap on the Main Measures
Inverse charging has over recent years been introduced in a variety of circumstances to tackle what is known as missing trader or “carousel” fraud. Readers may remember that this was rife in supplies of mobile phones, but there was nothing particularly sophisticated about the practice. A supplier would charge VAT on supplies to a customer, the customer would reclaim the VAT but the supplier would disappear without ever paying the VAT over to HMRC. By imposing inverse charging, the supplier is not responsible for the payment of VAT to HMRC and the customer both reclaims and pays the VAT so that he is in, in the majority cases, a net zero position with HMRC (there are circumstances where this would not be the case, for instance if the customer was partially exempt).
HMRC perceives the construction industry as an area of particular risk from missing trader fraud and therefore it announced in 2018 that the reverse charge was going to be extended into the sector.
The inverse charging applies to standard rated and reduced rated services but not zero rated services. It also applies solely to construction industry services but where there are mixed services and any element if a reverse charge construction service the whole supply is subject to the reverse charge.
Scope of the Provisions
It is important to remember that the scope of the provisions is exactly in line with construction industry services except where the recipient of the services is an end user or an “intermediary supplier” (an intermediary supplier is a more nebulous concept that that of end users. They are described in the guidance as VAT and CIS registered businesses connected or linked to end users, with examples being landlords and tenants sharing an interest in land or the recharge of building and construction services within a group of 51% group member companies). The concept of an end user is more easy concept and will be the more usual exclusion from the reverse charge in practice. An end user is a business not intending to onward supply the services as part of their business of building or construction.
The reverse charge does not apply to services where there is no CIS report, it applies only to business to business supplies and applies only to services provided to a VAT registered business.
HMRC has produced a reasonably helpful decision tree and this is reproduced below:
Since the measures were first announced, the main downside that has been identified in the industry is that suppliers will often have used the VAT received on payments as short term financing for working capital. Given that where a mixed supply includes a reversed charged element, the whole supply will be reverse charged, the impact on businesses could be material in certain circumstances.
One new stipulation contained in the announcements of 5th June 2020 is that end users or intermediary suppliers will need to confirm their status in writing to their suppliers in order that the services are outside the reverse charge regime. Where the service is reverse charged, the supplier must raise an invoice as usual, but must indicate on the face of the invoice that the supply is reverse charged. That will involve including one of these statements:-
- Reverse charge: VAT Act 1994 section 55A applies;
- Reverse charge: section 55A VATA 94 applies;
- Reverse charge: customer to pay VAT to HMRC.
In these circumstances the supplier will put no output tax in box 1 of their VAT return but record the value of the sale in box 6. The customer will put the value of the output tax in box 1, but no entry in box 6, put the value of the input tax in box 4 and put the value of the net purchase in box 7.
HMRC has published some useful guidance which can be found here:
If you require any assistance with reverse charging for VAT or indeed any other matters, please do not hesitate to get in contact with your Barnes Roffe contact partner.
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