HMRC publishes draft legislation on the proposed reverse charge for construction services

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VAT alert
Draft legislation published on Reverse Charge for Construction
Services
June 2018
Summary
HMRC has published draft legislation
outlining the proposal to impose a
‘reverse charge mechanism’ on supplies
in the construction industry.
In normal circumstances under normal
VAT accounting rules, it is, generally, the
supplier of goods or services that is
required to charge and account for VAT.
The customer normally pays the VAT to
the supplier who, in turn, then accounts
for that VAT to HMRC through its
periodic VAT return. The customer then
reclaims the VAT charged to it by the
supplier through its VAT return.
There is an inherent danger with this
system. In some cases, suppliers have
charged VAT and collected it from their
customers but they have then failed to
account for the VAT to HMRC. When the
customer makes a claim to recover the
VAT charged then, unless HMRC can
prove that the customer knew or should
have known that the transactions in
question were connected with fraud, it is
obliged to refund the input VAT to the
purchaser even though it has not
received the output VAT from the
supplier.
These new rules are intended to prevent
such VAT leakage in relation to services
supplied within the UK’s construction
industry by requiring the customer to
account for the VAT under a system
known as the ‘reverse charge
mechanism”.
VAT: Reverse charge mechanism for supplies of construction services
HMRC has recently published a draft statutory instrument setting out its proposals to
introduce a domestic ‘reverse charge’ in relation to standard and reduced rated supplies of
construction services.
Section 55A of the VAT Act allows HMRC to list certain supplies that are to be subject to the
reverse charge mechanism. By making the customer (the recipient of the supply) responsible
for accounting for any VAT due on the supply, there is no risk of the supplier disappearing
without paying the VAT over to HMRC.
For many years now, the UK’s VAT receipts have been hit by fraudulent suppliers charging
VAT to their customer but failing to pay over the VAT charged. This is known as ‘Missing
Trader” or ‘MTIC’ fraud and in some scenarios as ‘Carousel’ fraud due to the circular nature
of the fraudulent transactions. In recent times, the problem has surfaced in the construction
sector and it is with this sector in mind that HMRC has issued the new draft legislation.
In simple terms, the proposed new law – effective from 1 October 2019 – will remove the
obligation for suppliers of standard and reduced rated construction services to other VAT
registered construction businesses to account for any VAT due in respect of their supplies.
Instead, the obligation to account for the supplier’s output tax will transfer to the purchaser. If
the purchaser is fully taxable (ie he is able to reclaim all of the VAT incurred on the purchase
of goods and services) he will be entitled to reclaim the VAT accounted for on the supplier’s
behalf on the same VAT return. As a result, there would be an equal output VAT liability and
input VAT entitlement arising in the same VAT period and the supplier will have no
opportunity to default on his payment obligations.
As drafted, the construction services affected by the reverse charge mechanism under the
terms of the statutory instrument includes construction, alteration, repair, extension,
demolition or dismantling services in relation to buildings or structures, the installation of
heating, lighting, ventilation, air conditioning, power supply, drainage, water supply, sanitation
and fire protection systems. In addition, the internal cleaning of buildings during the course of
construction and both internal and external painting and decorating services and certain site
clearance, earth moving, excavation, tunnelling, boring, the laying of foundations, erection of
scaffolding, site clearance and other such works will become subject to the reverse charge.
All of these defined services (and the above list is not exhaustive) will become subject to the
reverse charge where the recipient of the service(s) uses them to make an onward supply of
construction services.
Comment – Whilst measures intended to protect the revenue from fraud are necessary,
the list of affected services is so wide that almost all construction services supplied by
a sub-contractor to a main contractor will be caught. This is a much wider application
of the reverse charge mechanism than was originally envisaged when the intention
was to focus on supplies of labour. The measures as drafted will have a much wider
impact and will affect many more businesses than originally envisaged. As a result,
affected businesses should seek appropriate VAT advice.
Stuart Brodie
Scotland
T +44 (0)14 1223 0683
E stuart.brodie@uk.gt.com
Karen Robb
London & South East
T +44 (0)20 772 82556
E karen.robb@uk.gt.com
Vinny McCullagh
London & South East
T +44 (0)20 7383 5100
E vinny.mccullagh@uk.gt.com