November 30, 2020
UK to implement domestic reverse charge on construction services as of 1 March 2021
The new United Kingdom (UK) Value Added Tax (VAT) domestic reverse charge is expected to be introduced with effect from 1 March 2021 (following two delays, most recently as part of HM Revenue & Custom's (HMRC) COVID-19 measures). The reverse charge will apply to supplies of construction services between VAT-registered subcontractors and contractors, which must be reported for Construction Industry Scheme (CIS) purposes.
The aim of the new legislation is to tackle perceived VAT fraud in the construction sector known as "missing trader fraud," whereby VAT is charged by the supplier but is not remitted to HMRC.
Who is affected?
Businesses making or receiving supplies of "construction" services, which must be reported for CIS purposes, will be affected by the change (provided those services are subject to VAT at the standard or reduced rate, the reverse charge will not apply to supplies subject to the zero rate of VAT).
The definition of "construction services" for the purposes of the reverse charge is based on the definition used in CIS and therefore includes (but is not limited to):
The domestic reverse charge is not designed to apply to services received by "end users" or certain intermediaries. "End users" are those who receive the construction services for their own use, and do not make an onward supply. Intermediaries connected with the end user of the service (such as a group company), or intermediaries who share a relevant interest in the property for which the supply is made with the end user (such as landlords and tenants), may also be treated as "end users" for the purposes of the domestic reverse charge.
However, in order to ensure that the domestic reverse charge does not apply, end users and relevant intermediaries would need to make the necessary notification of "end user status" to their suppliers. This should be done in writing and may be incorporated into a contract. In the absence of notification, the domestic reverse charge would apply. Based on the guidance and legislation, there is nothing to compel a business to notify. However, we understand that it may be preferential for some businesses to continue to incur VAT as normal, without the need to make changes to the VAT accounting systems and processes. However, for others, the cash flow benefit of applying the reverse charge, or the uncertainty around end user status in some arrangements, make it more appealing not to issue any written notification.
HMRC has issued guidance on the topic in order to provide clarity around some areas of uncertainty including:
Businesses should consider steps to be ready for the reverse charge which comes into effect from 1 March 2021.
Specifically, businesses may:
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (United Kingdom), London
Ernst & Young LLP (United Kingdom), Reading
PDF version of this Tax Alert