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:
- 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
- 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.
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.
When can you set off claims against different elements of a project
The Court’s decision raises important drafting considerations for construction contracts involving multiple elements of a project.
Drafting terms and conditions or negotiating a contract? Be wary of "unusual" and "exorbitant" exclusion clauses
When drafting a set of terms and conditions, companies must adhere to the requirements contained in the Unfair Contract Terms Act 1977
International Arbitration in India and Around the World
Rupa Lakha joined the panel discussing the latest developments in construction and dispute resolution.
Charles Russell Speechlys advises Acora on acquisition of Westgate IT
Westgate IT specialises in providing IT support to businesses in the South West.
Collateral Warranties – Are they also a ‘Construction Contract’?
What are collateral warranties and what do they mean for your construction contracts? Read more here.
Construct.Law - Summer 2021
Click here to read the summer edition of our construction & infrastructure publication - Construct.law
Taxation of asset holding companies in alternative fund structures - draft legislation published
The draft legislation is in respect of the much anticipated new regime for asset holding companies.
Charles Russell Speechlys advises Apposite Capital on acquisition of i2a Diagnostics
i2a is a leading provider of laboratory instruments, software and reagents for the clinical microbiology market in France.
Powering Real Estate
Is it plausible to meet the governments ambitious plan to get new houses off the gas grid by 2025? Watch our webinar here
Andrew Keeley writes for Construction News on the Supreme Court's decision in Triple Point Technology, Inc v PTT Public Company Ltd
The Supreme Court recently delivered its highly anticipated judgement in Triple Point Technology, Inc v PTT Public Company Ltd.
Steven Carey quoted by Construction Law on the risk of an increase in disputes over the materials shortage in the construction sector
Shortages of materials will likely lead to an increase in disputes as projects suffer ensuing disruption.
Finance Bill 21/22: the implications for corporate taxpayers
The Finance Bill 2021-2022 was published yesterday. What impact will this have on corporate tax payers?
Charles Russell Speechlys shortlisted for Best EIS/SEIS Legal/Regulatory Adviser at 2021 EISA Awards
The Awards denote excellence and recognise the achievements of EIS/SEIS practitioners over the past year.
Chris Hadnutt writes for Building on whether liquidated damages clauses survive termination of contract
Chris Hadnutt considers whether liquidated damages clauses survive termination of contract.
Brexit and withholding taxes
A key change at the end of the transition period is that the UK is no longer bound by either the EU PSD or IRD.
LIDW21: A view from London and India
Watch the discussion on the challenges of the possible rise in disputes in the construction and infrastructure sector in India.
Construction Post Pandemic: 'Great Expectations' or 'Bleak House'?
Watch the discussion on construction post pandemic for the UK and internationally.
Building Safety and the “Golden Thread”
What you should be doing now
Charles Russell Speechlys advises Avicenna Group on duo of pharmacy group acquisitions
The acquisition takes Avicenna to a total of 135 pharmacy branches.
Mock Conference with Counsel
An authentic insight into common challenges facing developer clients.