VAT reverse charge on building and construction services looms in March

The construction industry has continued to lobby against a VAT reverse charge (VRC) as it grapples with the Covid-19 pandemic and the end of the UK-EU transition period, but the measure looks set to come into force on 1 March 2021.

The industry’s largest trade bodies, including the Federation of Master Builders and Build UK, have campaigned for the VRC to be permanently scrapped on the grounds that it would harm the industry’s smallest firms and, amid the twin economic uncertainties of coronavirus and exit from the EU, at the worst possible time.

In June 2020, HMRC delayed the implementation of the VRC on building and construction services until March this year due to the impact of the pandemic on the construction sector. This followed a previous announcement in September 2019 that it would delay the introduction for a year in response to concerns that businesses were not ready to implement the changes, with the original implementation date intended to coincide with Brexit.

The VRC will have a major impact on construction businesses as they will need to adapt their accounting systems for dealing with VAT. Under the VRC, the UK customer that gets supplies of construction services, rather than the UK supplier, must account for the VAT due on these supplies on their VAT return.

There will be a negative impact on the cash flows for many affected businesses, as they will no longer get VAT payments from customers for services where the reverse charge applies. The VRC will not apply where the construction services are supplied to an "end user" or where a supplier is an "intermediary supplier" that is connected or linked to the end user.

HMRC guidance

In September 2020, HMRC issued a technical guide alongside practical guidance for suppliers and customers on the VRC. The guidance highlights the change that was made to the rules requiring end users or intermediary suppliers to notify their sub-contractors in writing that they are end users or intermediary suppliers in order for businesses to be excluded from the VRC. HMRC has produced a form of suitable wording in its technical guidance that can be used for the notification.

In its technical guidance HMRC states it will apply a “light touch” in dealing with errors during the first six months of the application of the reverse charge (provided that those errors were made in good faith). The guidance goes onto confirm that penalties will be considered in that period, only if the parties are deliberately taking advantage of the measure by not accounting for VAT correctly.

Osborne Clarke comment

Suppliers of building or construction services which are VAT and Construction Industry Scheme registered will need to make sure they have made the necessary administrative changes to accounting systems and processes to implement the VRC from 1 March 2021. The HMRC technical guidance is useful in explaining the administrative changes required – for example, what suppliers should include on the invoice. The technical guidance also confirms that if two parties have already had a reverse charge service between them on a construction site, for convenience they can both agree that any subsequent construction supplies on that site can be treated as reverse charge services.

Parties to new or existing construction contracts should also consider whether amendments to their contracts are required to cater for the introduction of the VRC. Such changes might include a confirmation of the end user status of an employer within the contract, or setting out prompts and notices as to the tax status of the employer to be given as part of the payment process. VAT clauses should also be assessed to determine if they can cater for the introduction of the VRC.

If you would like to discuss the VRC in more detail and how it may affect your business, please get in touch with one of the contacts below.