To combat the problem of missing trader fraud in construction industry supply chains the Government is proposing to introduce a VAT reverse charge for supplies of construction services to businesses from October 2019. The current problem relates to VAT on standard rated payments in the construction supply chain not being passed to HMRC.
Where does the reverse charge originate?
The reverse charge mechanism was created when the European Union VAT system was reformed for the launch of the single market, to help simplify the VAT accounting across the 28 member states. The reverse charge moves the responsibility for the reporting of a VAT transaction from the seller to the buyer of a good or service. In EU terms this reduces the requirement for sellers to register for VAT in the country where the supply is made. The reverse charge has also more recently been used as an anti-fraud measure for missing trader fraud.
How does the reverse charge work?
When the reverse charge is applied, the buyer of the goods or services makes the declaration of both their purchase (input VAT) and the seller’s sale (output VAT) in their VAT return. In this way, the two entries cancel each other from a cash payment perspective in the same VAT return. The seller of the goods or services therefore does not need to charge and collect VAT from the buyer of its goods or services. If the buyer can reclaim VAT, they can also reclaim the reverse charge amount – so the reverse charge is generally identical in treatment to other VAT payments however it must be recorded on the VAT return for VAT compliance purposes.
What are the new proposals?
The new Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019 seeks to remove VAT from the construction supply chain so that sub-contractors supplying construction services do not charge VAT on their services and the recipients of the supply make a reverse charge adjustment in their VAT return.
It is proposed that the definition of construction services follows that of ‘construction operations’ used for the Construction Industry Scheme (CIS).These are broadly:
· construction, alteration, repair, extension, demolition or dismantling of buildings or structures;
· installation of heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
· internal cleaning of buildings;
· painting or decorating internal or external surfaces; and
· services integral, or preparatory, to the above.
At present there is a consultation ending on the 20 July 2018 on the draft legislation which focuses on defining the boundaries of the new reverse charge and which services are specified or excepted. The draft legislation does not cover many of the practical day-to-day issues around the operation of the charge. These matters will be set out in HMRC guidance yet to be released.
It has been confirmed that the reverse charge will be limited to construction services and the intention is that consumers, developers, property investors, landlord-tenant payments, and intra-group transactions between connected companies will be excluded.
One of the main concerns as raised by the British Property Federation is that it is envisaged that businesses will have to issue a ‘charge me’ certificate where they fall within the scope of excepted supplies and should be charged VAT. If this approach is followed the impact of the change could be very wide reaching and would create a significant administrative burden to many businesses not in the construction sector. An alternative and preferable approach would be to have ‘please don’t charge me’ certification which would focus the impact of the change on construction firms and their sub-contractors.