HMRC has been publicising, with varying degrees of success, the launch of a new VAT domestic reverse charge (DRC) for specific supplies within the construction sector, starting from 1 October 2019.
Reverse charge or end user?
HMRC has previously implemented DRCs for other services where it considers there is a significant opportunity for VAT fraud (eg telecoms, emissions allowances and renewable energy certificates).
In the construction sector, the new DRC is focussed on businesses that supply or receive specified services that are reported under the construction industry scheme (CIS) direct tax rules, and will require customers to self-account for the VAT due on supplies received, rather than it being charged by the supplier. Only invoices issued for services supplied to the end user, ie the final consumer of services, will be excluded from the scheme and remain subject to normal VAT accounting rules.
Assessing whether a supply is made to an end user relies on the supplier making a number of checks prior to commencing work, as well as the customer issuing an end user certificate.
Guidance on the changes were published by HMRC in November 2018, with little promotion, and an updated version was released in June 2019.
HMRC’s latest guidance seeks to clarify the details of the new regime and provides examples of how the new DRC will work in practice. It is important to note that the new guidance contains some important changes. These include:
- a de minimis threshold for supplies made to one customer where the new DRC only applies to part of the services;
- the concept of intermediary suppliers being deemed to be end users and therefore excluded from applying the new DRC;
- the inability for suppliers to use the cash accounting scheme where the reverse charge applies; and
- the exclusion of employment businesses that supply construction workers from the new rules.
These wholesale changes to VAT accounting in the construction sector, which also include specific requirements regarding invoicing, come into effect from 1 October 2019.
HMRC is promising a light touch on penalties for the first six months following the implementation of the change, provided it is satisfied that the taxpayer has attempted to follow the new rules. What actions will be considered sufficient to evidence that an attempt has been made to follow the new rules is not clear.
Notwithstanding the penalty position for suppliers, where a supplier charges VAT incorrectly and it is recovered as input tax by the customer, HMRC will seek to penalise the customer for recovery of VAT that is non-deductible input tax.
Impact throughout the supply chain
Our experience suggests that the construction industry is not yet ready for these changes. Specifically, we suspect suppliers may not be prepared for the cash flow impact throughout the supply chain that will be created by businesses no longer benefitting from temporarily holding on to the VAT charged, in bank accounts for up to three months, prior to submitting a VAT return and making payment to HMRC.
In addition, customers may be slower to pay suppliers, compounding the cash flow issues from not holding on to the VAT, as invoices showing VAT charged incorrectly are likely to be rejected by customers until invoices are compliant with the new DRC rules.