VAT reverse charge for building and construction services – are you ready for it?

Absent any further delays, the new VAT reverse charge on construction services will come into effect on 1 March 2021.  This means that those working in the construction industry may need to pay VAT differently.  Introduction of the reverse charge has been delayed, firstly to allow more time for businesses to prepare and then due to the pandemic.

In summary, the reverse charge is a mechanism to prevent the avoidance of VAT by construction service suppliers who charge and collect VAT from the recipient but fail to account for that VAT to HMRC.  Where the reverse charge applies, the burden of accounting for VAT shifts to the recipient (i.e. developers, employers and main contractors) where they receive supplies from their contractors/sub-contractors.  So, whilst previously the relevant contractor or subcontractor accounted for VAT to HMRC this has now shifted to the recipient of such construction services. Certain criteria must be satisfied for it to apply (including VAT and Construction Industry Scheme registration) and there are a number of exclusions.

The definition of construction services is wide and covers those supplies which fall within the scope of the Construction Industry Scheme.  The reverse charge does not apply to supplies to end users who do not make onward supplies of the building and construction services supplied to them or an "intermediary supplier", i.e. those linked to the end user (such as landlord or tenant).  A design and build contractor can (provided the necessary requirements are met) also be considered as an intermediary supplier, and therefore normal VAT rules would apply to supplies bought in.  There are also several excepted services which are exempt when supplied on their own.

Here is a link to the HMRC guidance and to the VAT reverse charge technical guide.

What is the impact for clients?

Transactions will need to be assessed to determine whether the reverse charge applies and, if relevant, drafting may very likely be needed in construction contracts to cover it.  Where applicable, accounting systems will need to deal with the reverse charge and the mind-set change that is needed in embedding this in internal operations, as reverse charge will have a very tangible impact on cash flow.

Whilst penalties are imposed for errors in VAT returns, HMRC says that it will "apply a light touch" for any errors that occur in the first six months of the new legislation to allow for businesses to adjust. However, after the grace period, these penalties will apply if a business continues to make such errors.

Clients should review existing contracts and speak to their Foot Anstey contact for advice on the issue.