The next step

To HMRC's consultation

[Weblink]

New VAT rules for the construction industry

The VAT chain of supply

Usually, every business in the supply chain adds VAT to the goods or services they sell and the purchaser (if they are VAT registered) reclaims it, until the chain ends with the final consumer, i.e the person who isn’t entitled to reclaim the VAT. This works fine until the supplier charges VAT but doesn’t account for it to HMRC, say because they go bust or disappear from the tax system and pocket the VAT. The latter is a growing problem in the construction industry and so the government is introducing a “reverse charge” to combat it.

Reverse charge

The concept of reverse charge VAT is nothing new. For example, it applies where a business purchases goods from another EU country. The way it works is simple - instead of the suppler (seller) charging the customer VAT, the customer charges itself VAT and then, because it has paid VAT as a purchaser, reclaims it in the usual way.

Example. Acom Ltd supplies demolition services to Buyer Ltd (a building firm) and charges it £10,000, but under the reverse charge rules doesn’t add VAT. Instead, Buyer Ltd adds the supply to its next VAT return as if it were a sale which increases its VAT bill by £2,000 (£10,000 x 20%). On the same VAT return it includes the purchase and reclaims the £2,000. That way there’s no risk that Acom could abscond with the VAT, and Buyer Ltd is no better or worse off because of the reverse charge.

The new legislation

The draft legislation, which is open for consultation until 20 July 2018, won’t take effect until 1 October 2019 (see The next step) So if you’re in the building or construction industry, you have plenty of time to understand when you should apply the reverse charge and which types of supply it affects.

Tip. As a customer, if you’re not in the construction industry you won’t be affected by the reverse charge. If you pay a building contractor to carry out some construction work on your business premises, it will charge you VAT as usual which you’ll be able to reclaim, subject to the usual rules.

Outside the new rules

Supplies to non-business customers are, of course, also outside the new rules. The reverse charge also won’t apply where a construction business supplies another which it is connected to. This rule is explained fully in the consultation document.

Familiar terms and definitions

The reverse charge will apply to construction industry services and most types of goods supplied as part of them. Helpfully, the services and goods covered by the new VAT rules are the same as those in the Construction Industry Scheme, so if you’re in the industry you’ll be familiar with them.

Note. The draft legislation includes lists of services and goods which are specifically included or excluded. It’s mercifully very short, plainly written and easy to follow.

For a link to HMRC’s consultation, visit http://tipsandadvice-tax.co.uk/download (TX 18.19.07).