Following the introduction of the domestic reverse charge for construction services on 1 March 2021, many construction businesses will be preparing their first VAT returns under the new regime. From our experience of advising construction clients, what appears to be a simple change is throwing up significant challenges for businesses.
To recap, under these new rules, a VAT-registered business, which supplies certain construction services that fall within the scope of the Constructions Industry Scheme (CIS) to another VAT-registered business for onward supply, will be required to issue a VAT invoice stating that the service is subject to the domestic reverse charge. As a result, it is the customer that must account for the VAT due instead of paying the VAT amount to the supplier on receipt of a VAT invoice.
If the customer is not onward supplying the construction services but are instead the “end user” of the services, the responsibility rests with the customer to confirm that normal VAT rules applies. However, this does not remove the responsibility of the supplier to ensure that the correct VAT treatment applies. As the reverse charge only applies to standard and reduced rate services, construction suppliers will still need to identify where their supplies are zero rated.
At Anderson Anderson and Brown LLP, we have seen some suppliers who, when advised that their customer is the “end user” and that normal VAT accounting will apply to the supply, have incorrectly applied VAT to their zero-rated construction services. This creates an issue for the customer as they are not entitled to recover incorrectly charged VAT.
Another area that has caused some confusion for construction businesses is where a sub-contractor enters into separate contracts with the same customer for materials and installation services. Although a material-only supply is not covered by the reverse charge, where the supplies under these two separate contracts are supplied at the same time and on the same site, for VAT purposes, they will be treated as a single supply. Provided this supply falls within the scope of CIS, the supply will also fall within the scope of the reverse charge. If the supplier seeks to split these supplies and not apply the reverse charge, this can again lead to incorrectly charged VAT.
The domestic reverse charge does not only apply to UK established suppliers and customers. Our clients have experienced issues where one of the parties to the supply is not a UK business.
If the sub-contractor is registered as a non-established taxable person as they have no fixed establishment in the UK, provided that the customer is a UK established and VAT registered business, the VAT place of supply rules for services takes precedence. Consequently, whether provided to an “end user” or not, these construction services fall within the reverse charge for imported services and in all cases the customer accounts for the VAT due.
However, if the customer is also not established in the UK, the supplier will have to consider whether normal VAT rules apply, for example where the customer is an “end user” or they are not VAT registered. Alternatively, if customer is VAT registered, the services fall under CIS and the services are being onward supplied, the supplier will need to apply the domestic reverse charge for construction services.
These are just a sample of the issues we have seen in the short time since the introduction of the new reverse charge. Although HM Revenue and Customs has indicated that they will apply a “light touch” when reviewing the changes, going forward this will be an area where visiting officers will focus their attention.
Construction businesses should ensure that they understand the new rules and have processes in place to identify when VAT is to be charged and when the reverse charge will apply. We recommend that if they have any concerns that appropriate professional advice is obtained.
If you have any further questions, please don't hesitate to contact Alistair Duncan, Indirect Tax Director at AAB.