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Insights

30 May 2019

Making (construction) customers pay

In the Spring Budget 2017, the government announced its intention to introduce an alternative accounting mechanism for VAT in the construction sector, which the government considers to be a high risk area for missing trader fraud. The intended target of the legislation is sub-contractors who provide groups of workers to the construction sector. Supplies to end consumers are not intended to be affected. 

Background to the changes

The government consulted on the scope of the measure in 2017. Changes to the Construction Industry Scheme (“CIS”) were considered as part of the consultation process to narrow the availability of gross payment status under the Scheme. That measure has been dropped and the government has instead decided to invest more heavily in compliance to police gross payment status.

On 7 June 2018 draft legislation for the VAT reverse charge measure was published for technical consultation and on 7 November 2018 final legislation was published with a number of changes that bring the measure more closely into line with the scope of the CIS rules.

The purpose of the measure is to make the customer of supplies of construction services which attract VAT (other than VAT at the zero-rate) responsible for accounting for VAT rather than the supplier. End consumers are not within the scope of the measure and so VAT on any supplies to end consumers will be accounted for in the usual manner.

Details from the draft legislation

The legislation brings new payments within the scope of the existing VAT reverse charge mechanism that is used in other industries (such as mobile phones and utilities).

The basic rule is that if a taxable person makes a supply to another taxable person and the supply falls within this measure, then the recipient of the supply accounts for VAT to HMRC and can recover the VAT from HMRC.

The scope of the supplies caught by the legislation is very similar to the existing CIS, which will assist taxpayers in understanding the new provisions. Construction services (defined in a similar way to the CIS and very broadly) are within the measure, together with any materials supplied with the services. As with the CIS, supplies of professional services such as architects and surveyors are excluded except where they form part of a single supply with construction services (as is common under design and build contracts).

The changes to the legislation between the draft and final versions enhanced this alignment with the CIS. Supplies falling outside the scope of the legislation (“excluded supplies”) are now defined as those for which a CIS return is not required, meaning the legislation closely tracks the scope and exceptions to reporting under the CIS, but with a broad carve-out for end users (who should confirm in writing their status as an end user to the supplier) and to certain “intermediary suppliers”.

Under the intermediary supplier carve-out, supplies are excepted if:

  1. a person (the intermediary supplier) receives services within the scope of this measure and makes an onward supply of those services without material alteration or further processing; and
  2. either:
    • the intermediary supplier is connected with the expected end user of the services (e.g. they are companies in the same group); or
    • the suppliers are made in relation to property in which both the intermediary supplier and the end user have a “relevant interest” (e.g. landlord and tenant).

Tenants currently often find themselves within the scope of the CIS unexpectedly where they agree to take responsibility for landlord’s works, but the intermediary carve-out will be of use in these situations to prevent the reverse charge applying. It is worth noting that the definition of connected persons under the legislation is more narrowly cast than in other contexts.

Impact on accounting for VAT

Businesses will need to adjust their VAT accounting to accommodate the new rules. The (one off) costs incurred in doing so will be the main impact on businesses as a result of the new rules. Cash flow may also be an issue for businesses that currently use VAT paid by customers as part of their working capital. Both recipients and suppliers will need to reflect the application of the reverse charge in their VAT returns.

As noted above, in order to be within the scope of the reverse charge the recipient must be a taxable person (i.e. registered for VAT or required to be registered). For the purpose of determining whether a recipient is a “taxable person”, supplies received by the person for which they must account under the reverse charge are not treated as supplies made by that person (given effect by disapplying a general rule in the overarching VAT legislation).

This is a welcome change from the previous proposal. The effect will be beneficial for smaller suppliers who are otherwise not required for register for VAT on the basis that their supplies do not exceed the compulsory registration threshold. Supplies that these businesses receive under the VAT reverse charge will not be counted when determining whether this compulsory registration threshold is reached.

Next steps

The final legislation is due to take effect from 1 October 2019, so there is time for businesses to prepare their accounting systems and manage any impact on cash flow. There are only limited de minimis provisions in the legislation (in addition to the provision discussed above for smaller suppliers, there is a carve out if the value of a supply together with corresponding supplies to the recipient in a single month do not exceed £1,000 in aggregate) and so businesses of any size in the construction industry will need to consider their compliance.


For further information, please contact Helen Coward or Brett Rawlings. 

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