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.
Client alert: Construction under competition law spotlight
We outline the three investigations which have either recently concluded or are ongoing together with what this means for businesses.
Case Study: One Blackfriars Limited
An informative and positive judgment for administrators selling high-value property in distressed and complex scenarios.
Keeping Up With Construction: Handover at Practical Completion - Practical Pointers
Practical tips for the handover of a successful project.
Helen Coward, Hugh Gunson and Guy Bud write for Tax Journal on remuneration arrangements in partnerships with mixed membership
Odey Asset Management LLP and HFFX LLP consider the law relating to remuneration arrangements in partnerships with mixed membership.
Steven Carey writes for Building on whether a company can provide expert services in claims for and against the same party
A recent appeal case looked at whether a company can provide expert services in claims for and against the same party.
InvestAfrica: Checking in or Checking out? Financing Africa’s Hotels in 2021
The discussion examined the strategies investors and financial institutions can implement to mitigate the effects of the pandemic.
eprivateclient and Wealth Briefing cover the news of the hire of tax specialist Annika Fünfschilling in Zurich
Annika joined as a Senior Associate in the firm's Zurich office on 15 March 2021.
Charles Russell Speechlys develops Zurich offering with the hire of Annika Fünfschilling
Annika is an attorney-at-law and Swiss certified tax expert, and becomes the first Swiss-qualified lawyer working from the Zurich office.
Infra.law - Spring 2021
Click here to read the latest edition of our construction and infrastructure publication, Infra.Law.
Assignment, novation and construction contracts - What is your objective?
What are the terms of the contract under which the sub-contractor carries out the works for the employer?
Adjudication enforcement and exclusive jurisdiction clauses post-Brexit
Does an exclusive jurisdiction clause in favour of a foreign court preclude an English court from enforcing an adjudicator’s decision?
Mixed news for corporation tax payers in today’s Budget
The announcement brings good news for the short term - and bad news in the longer term for corporation tax payers.
Helen Coward quoted by Yahoo News and eprivateclient on the increases to corporation tax announced in the Chancellor's Budget
Rishi Sunak unveiled several tax increases across multiple areas and what dates they will be implemented.
The UK’s post-Brexit rules for skilled workers – Key implications for the construction industry
As a result of the new Points Based Immigration System , UK companies in the construction sector will not be able to sponsor labourers.
Andrew Keeley writes for Building on the consequences of a liquidated damages clause being unenforceable
Parties often agree to predetermine the level of damages that an employer is entitled to claim in the event of late completion.
VAT Reverse Charge for Construction: Now, never, later?
Grand designs – Who should take the design risk in an MMC project?
MMC have been touted as a way to tackle costs and inefficiencies within construction, but who takes responsibility for the design ?
EMI share options, Covid-19, and Brexit – where are we now?
What are the new measures to employers operating EMI schemes that have been affected by the pandemic?
David Savage quoted by Construction Law on the confusion over construction contract liabilities arising from Covid-19
An increase in construction disputes relating to time and cost impacts of Covid-19 related project impacts has been seen.