Construction Services Domestic Reverse Charge

Introduction

From 1 October 2019, HMRC are introducing a new UK-wide approach to how VAT is reported in the construction industry. The measures specifically affect the supply of construction services between construction businesses. Here’s what you need to know about the Construction Services Domestic Reverse Charge (CSDRC):

Background to the CSDRC

HMRC are targeting VAT fraud in the construction industry. Loss of VAT revenue through “missing traders” is increasingly an issue so HMRC are introducing new legislation to tackle it.

Missing trader fraud is where a supplier charges VAT to a customer or buyer on services provided, is paid the VAT but then goes “missing” before paying it to HMRC.  The aim is to deny a subcontractor the opportunity to collect VAT and not pay it over to HMRC.

The new legislation is a “VAT reverse charge”. When referring to VAT, a reverse charge means that the buyer now becomes responsible for accounting for the VAT rather than the supplier.

The construction services reverse charge is aimed at supplies by subcontractors to contractors, not at supplies by contractors to an end user. End users are the final customers or those who receive construction services but do not supply them on

From October this year, the construction industry will need to comply with these new measures by adapting some of their processes and making sure they understand where they fit in the supply chain.

How the reverse charge will work

The reverse charge will only affect supplies at the standard (20%) or reduced (5%) rates where payments are required to be reported through the Construction Industry Scheme (CIS).

Unlike CIS, however, the reverse charge will also extend to building materials included within a supply of building work. 

The reverse charge will also only apply to UK taxable persons; i.e. both parties have to be registered or liable to be registered.  The reverse charge will not however apply to ‘deemed contractors’ – those caught by CIS but who are actually end-users.

If you are a VAT-accounting main contractor

Under the reverse charge procedure, main contractors will:

  1. Account for the VAT on the subcontractors services as output tax in box 1 of the VAT return and
  2. Treat the same amount as input tax to be reclaimed in box 4 on the same return (subject to the normal rules).

Input tax will normally be recoverable in full, so the transaction has a nil net tax effect for the main contractor.

If you are a VAT-accounting subcontractor

Subcontractors issuing invoices to which the reverse charge applies must show all the information that is normally required to be shown on a VAT invoice, with a note that the reverse charge applies, and the customer is to account for VAT. The invoice should also show the VAT amount even though it will not be charged for. 

On the supplier’s VAT return, there will be no output tax declared in box 1, but the value of the supply is included in box 6.

We know that many subcontractors do not issue VAT invoices, but we anticipate that HMRC will expect similar information to be included on any requests for payment issued, or authenticated receipts documentation used.

There is potential concern for subcontractors using the flat rate scheme (FRS) as VAT due is calculated on total turnover but HMRC have yet to comment on this.

It is likely that many subcontractors will become repayment traders as they will recover VAT on materials but will not be required to declare output tax. 

Read more on our Contractors Blog.

We’ll keep you updated as and when HMRC guidance is available but do contact us in the meantime should you have any questions or concerns.