14 Feb 2019

VAT Charge affecting Construction industry


HMRC recently held a consultation, requesting views on the proposed introduction of a reverse charge mechanism to combat VAT fraud in the construction sector. Following its conclusion and analysis of feedback, HMRC has published draft legislation in the form of a Statutory Instrument which will become section 55A of the VAT Act 1994 with effect 1 October 2019.

The type of supply, to which the reverse charge will apply, is borrowed from the meaning of ‘construction services’ in the Construction Industry Scheme (CIS) legislation, Finance Act 2004.

The measure aims to shift liability to account for VAT on supplies of construction services to the customer, rather than the supplier, in certain circumstances. This action will help to prevent cases of ‘missing trader’ or ‘carousel’ fraud within the industry. This type of fraud occurs when criminal businesses, often working in cohesion, obtain separate VAT numbers in order to pass goods and/or services down a supply chain. Eventually one of the traders in the chain goes ‘missing’ after receiving output VAT from its customers, but before paying the amounts over to the Government. The construction sector is particularly at risk because a labour-only business can charge VAT despite incurring relatively little on its costs, and amounts charged to customers are often significant. Placing the liability to account for VAT with the customer, means that the supplier does not charge or receive an amount in lieu of VAT, removing the risk of that cash not being appropriated to HMRC.

The reverse charge will affect all customers in the supply chain who receive services, which they themselves use to make an onward supply of ‘construction services’ as defined in the legislation – i.e. to the final contractor in the supply chain.

For example, a contractor who receives supplies from a sub-contractor and passes those supplies on to their customer as part of a further supply of a construction services project, must reverse charge the supplies of that sub-contractor. However, a main contractor receiving supplies which it consumes in its final supply of a completed property will not. There are exceptions, such as for certain supplies made to contractors operating in the same VAT or corporate group.

All of that does of course, lead a change in the way small VAT registered sub-contractors must account for VAT going forward. Whilst a sub-contractor will no longer charge VAT on their supplies, it is assumed that the current domestic reverse charge provisions which apply to other supplies (such as electricity & gas that require a supplier to show the amount of VAT to be reverse charged) will need to be followed. A sub-contractor will still be making taxable supplies which entitle them remain VAT registered and recover input VAT on their costs.

There will also be further administrative complications, such as specific wording which must be included on invoices etc. Details of further administrative requirements will likely be provided via an update to VAT Notice 735 in due course.

If you would like to discuss this further, please contact Steve Chamberlain on 01225 472800 or send him an email