The Reverse Charges legislation for the Construction Industry will come into effect on 1st October 2019.
There are the following questions that need clarifying:
- Why is the new legislation is being introduced?
- Who does this affect?
- What exactly does this affect?
- How does it work?
- What impact is this going to have on the affected businesses?
Let’s start with the first question: Why?
This is an anti-fraud measure. The new regulation should prevent fraudulent suppliers charging VAT to the customer and disappearing instead of paying it over to HM Revenue and Customs.
Who does this affect?
The measure will affect most VAT registered businesses involved in buying and selling specific construction services through the supply chain where payments are required to be reported through the Construction Industry Scheme (CIS).
It does not affect ‘end-users’ who are customers receiving the supply for their own use rather than selling it on as part of their business services.
In a nutshell, reverse charges need to be accounted for in the supplies between contractors and sub-contractors, as defined by CIS, unless they are supplied to a contractor who is an end user.
Businesses that supply specified services to connected parties within a corporate group structure or with a common interest in land will be not be affected by this.
What exactly does this affect?
This new reverse charge will apply to certain supplies of construction services referred to as “specified services”. The reverse charge will affect payments reported through the Construction Industry Scheme (CIS). Services are therefore aligned to those listed under CIS. As per ‘The Value Added Tax section 55A, Specific services and Expected Supplies Order 2019’ and are as follows:
‘(…)5. “Construction services” comprise—
(a) construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations;
(b) construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including (in particular) walls, roadworks, power-lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipe-lines, reservoirs, water-mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence;
(c) installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
(d) internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
(e) painting or decorating the internal or external surfaces of any building or structure;
(f) services which form an integral part of, or are preparatory to, or are for rendering complete, the services described in paragraphs (a) to (e), including site clearance, earth-moving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works’.
The reverse charge includes goods, if those goods are supplied with the specified services.
The reverse charges do not affect zero-rated supplies of construction services.
How does The Reverse Charge Scheme work?
The Reverse Charge moves the responsibility for the reporting of VAT transactions from the sellers to the buyers of the specific services and goods supplied with those services. Customers will have to account for supplier’s output VAT in their VAT Return instead of paying that VAT to their suppliers. They can also reclaim input VAT on the purchase in the usual way. VAT returns should include the following entries:
- Suppliers of services and goods that are affected by reverse charge do not account for any output vat on the affected sales in box 1 of the VAT Return. Instead they must enter the value of those sales in box 6.
- Customers must account for Output VAT on purchases affected by reverse charges in box 1 of the VAT Return. They must not enter the value of those purchases in box 6. Customers are able to reclaim the input tax on those affected purchases in box 4 of the VAT Return and include the value of the purchases in box 7.
- Suppliers will need to issue a VAT invoice that states that the supplies are subject to the reverse charge.
What is the impact of the Reverse Charge Scheme?
The first obvious one-off cost will relate to learning and introducing the new regulation into your business routine.
End users who have to report payments through CIS may need to tell their suppliers that they are end users and that the reverse charge should not apply. It will also require some businesses to tell their suppliers, that they are not end users. This might be sensitive business information that could adversely affect them.
The more on-going negative effect that the reverse charge will have on small and micro businesses will be a loss of cash flow where output VAT is no longer received.
Sales covered by the reversed charges are excluded from the flat rate scheme. It means that businesses that benefited from the flat rate scheme will no longer be able to do so in relation to the affected sales, and will be financially worse off as a result.