The VAT Reverse Charge Has Arrived
As HMRC clamps down on VAT fraud, suppliers of construction services should ensure they understand how the reverse charge works.
How does the VAT reverse charge work?
On 1 March 2021, the domestic VAT reverse charge was introduced to tackle VAT “missing trader” fraud in the construction industry – where a supplier collects VAT on their services and disappears without passing the VAT onto HMRC. It is estimated that this results in lost VAT revenue of around £100m each year.
The reverse charge requires the customer, rather than the supplier, to account for the VAT, thereby depriving the supplier of the opportunity to collect the VAT and then disappearing before accounting for it to HMRC.
When will it apply?
The reverse charge is triggered by the supply of specified construction services to other businesses in the construction sector. These services are similar to those services defined as “construction operations” under the Construction Industry Scheme (“CIS”) and it follows that if a supplier’s services are caught by the CIS the customer should consider whether the reverse charge should be applied.
Some services are explicitly excluded from the reverse charge such as oil, gas and mineral extraction, the installation of security systems, and the services of professionals including architects, surveyors and similar consultants.
The reverse charge only applies where the services are supplied to another construction business who sells them on – the rules do not apply where the services are provided to a consumer or “end user”. There is also an exclusion for supplies between connected businesses.
What are the likely practical implications?
While the goal of the reverse charge is to reduce fraud, it may still impact honest suppliers of construction services. Firstly, there will be obvious administrative implications as businesses adapt to these new rules. Secondly, the fact that suppliers will receive no VAT on their services where the reverse charge rules apply is likely to result in cash flow issues for some businesses in the construction sector. Under the old rules the VAT collected by the supplier obviously had to be accounted for to HMRC but nonetheless it did provide a source of short-term income, a cushion which will be lost going forwards.