VAT reverse charge for construction to be linked to CIS reporting obligation

Revised regulations now provide that the reverse charge will only apply in respect of payments which need to be reported under the Construction Industry Scheme (CIS). There is an exemption for supplies that need to be reported under CIS but are made to 'end users' of construction services, such as occupiers of the property. The reverse charge will apply from 1 October 2019.

The CIS is a tax deduction scheme which involves tax being deducted at source from payments made by a contractor to a subcontractor which relate to construction work. Obligations under CIS usually only apply to those operating in the construction industry. Non-construction businesses are treated as 'deemed contractors' required to report payments under CIS if their average annual expenditure on construction operations over a three year period exceeds £1 million. This typically catches businesses with a significant spend on construction such as large retailers and public bodies. 

"The revised regulations will make it easier to identify when the reverse charge will not apply and will reduce administration in respect of occasional users of construction services," said Clara Boyd, a VAT expert at Pinsent Masons, the law firm behind Out-Law.com.

Subcontractors will know if their customer is reporting payments under CIS, because they will have been asked to confirm their CIS status, she said. The change therefore means that subcontractors and contractors will be able to assume that the reverse charge does not apply and that they should charge VAT in the normal way if their customer is not applying CIS. If the customer is applying CIS they will assume the reverse charge applies unless their customer has confirmed in writing that they are an end user for reverse charge purposes.

"Businesses reporting payments under the Construction Industry Scheme are likely to be building contractors or other businesses and public bodies making regular large purchases of construction services," according to an explanatory memorandum accompanying the regulations. "They can therefore be expected to be familiar with how the reverse charge operates and be able to tell their supplier whether or not they are an end user if appropriate."

"Suppliers of construction services will also be familiar with when the Construction Industry Scheme applies and therefore be able easily to determine whether the reverse charge should apply to their supplies," the memorandum said.

It was confirmed in the budget that the reverse charge will be introduced, as planned, from 1 October 2019 to combat VAT fraud in the building and construction sector, which is estimated to cost the Exchequer over £100m a year.

Under the new rules, the customer receiving the supply of specified construction services must account for the VAT due instead of the supplier. Certain supplies will be excluded from the domestic reverse charge, such as supplies made to end users, supplies between connected parties and between landlords and tenants.

The domestic reverse charge is an anti-fraud measure that has already been introduced for services and goods where there is a high risk of missing trader fraud, such as telecommunication services, mobile phones and computer chips. The reverse charge mechanism shifts the liability for accounting for output VAT from the supplier to the customer and therefore prevents the supplier from charging VAT to its customers and then absconding with the VAT.

"The domestic reverse charge will have a significant impact on VAT compliance and cash flow management for the businesses involved. New systems and processes will need to be introduced or current systems and processes will need to be amended in order for businesses to be able to implement the new rules as of 1 October 2019," said Maryse Heijnen, a VAT expert at Pinsent Masons.

HM Revenue & Customs (HMRC) recognises the difficulties around implementing the new rules and has announced in guidance that it will apply a light touch in dealing with related errors that occur in the first six months after introduction.