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Introduction of VAT ‘reverse charge’ from 1 March 2021 for building and construction services

From 1 March 2021, the domestic VAT ‘reverse charge’ for supplies of building and construction services will come into operation. The new measures apply to VAT-registered businesses who are supplying/receiving standard or reduced-rated services reported under the Construction Industry Scheme (“CIS”). Alexander Jullienne looks at what these measures could mean for your business.

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From 1 March 2021, the domestic VAT ‘reverse charge’ for supplies of building and construction services will come into operation. The new measures apply to VAT-registered businesses who are supplying/receiving standard or reduced-rated services reported under the Construction Industry Scheme (“CIS”). HMRC has provided a list which sets out the services where it is mandatory to use the reverse charge regime and services where it is not required (see https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services).

The new VAT reverse charge regime applies for all VAT invoices issued on or after 1 March 2021. It is therefore essential for businesses in the building and construction industry to be aware of whether the supply of its services will be caught under the new VAT reverse charge regime.

The new legislation will change the way in which VAT is collected in the building and construction industry as it will shift the accounting responsibility for VAT from the supplier of building and construction services to the recipient of the supply. Professional work carried out by architects, surveyors, building engineers when supplied on their own are not required to use the reverse charge.

Importantly, there are exemptions to situations in which the reverse charge will not apply. These include:

  1. Supplies to end-users. An end-user for the purpose of the regime is a consumer and final customer who receives supplies but does not make onward supplies of the building and construction services supplied to them. Examples of end-users include developers and owner-occupiers. Therefore, businesses that only, or mainly, work for end-users (e.g. main contractors) will continue to receive VAT for the services provided to those end-users.
  2. Intermediary suppliers. If an intermediary buys construction services and re-supplies them to a connected or linked end-user, without making alterations to the supplies, then they are treated as an end-user and the VAT reverse charge does not apply. To be connected or linked to an end user, the intermediary supplier must either: –  have a relevant interest in the same land where the construction works are taking place e.g. landlord or tenant;
    –  be part of the same corporate group.
  3. Employment businesses. Supplies by employment businesses (e.g. construction workers requested by the customer from the employment business) are not subject to the reverse charge. It is important to recognise the distinction of employment businesses with labour only sub-contractors (e.g. bricklayers, electricians or plumbers) who are subject to the reverse charge.
  4. Work undertaken internationally.

An end-user or intermediary user must written provide notification to the supplier of its end-user or intermediary status. This can be done by post, email or in contract. If notification is not provided, then the supplier must assume that the reverse charge applies and will not charge VAT to the customer.

In practice the effect of the scheme is such that ordinarily, a sub-contractor who has supplied construction services under the CIS and submits a claim for payment, will now no longer be able claim the VAT on that supply. Instead, the main contractor will be required to pay the VAT to HMRC on the sub-contractor’s behalf. The impact of these changes will be significant on cashflow, particularly in the short term as subcontractors will no longer receive the gross value of payments.

Businesses will inevitably take time to adjust to the effects of the VAT reverse charge changes. As a result, HMRC has said it will “apply a light touch” for any errors made in the application of the new regime on the basis that businesses have attempted to comply and acted in good faith.

It is important that suppliers of CIS services take heed of the impact of the VAT reverse changes on its business including, where relevant, updating their administrating and accounting systems and processes to implement the VAT reverse charge regime from 1 March 2021. If you need guidance on the impact of changes, then professional legal or tax advice should be sought from your professional advisors or from HMRC. HMRC have published technical guidance which can be found here.

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You are contacting

Alexander Jullienne

Associate

alexander.jullienne@collyerbristow.com



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