The VAT Reverse Charge was finally introduced – after some delays – on 1 March 2021. So, one year on, how is this affecting the construction sector?
A domestic reverse charge means the UK construction business who receives supplies of construction services from sub-contractors must account for the VAT due on these supplies on their VAT return, as opposed to the UK supplier doing so.
It’s a little like an employer accounting for all the income tax for their staff, as opposed to each employee doing so, and it follows similar measures introduced in other sectors, as an attempt to remove the scope for VAT fraud.
The domestic reverse charge for building and construction services was originally planned to come into force on 1 October 2019, but was delayed by a year in response to industry concerns that some businesses were not ready to implement the changes required. It was delayed then for a second time, but finally came in on 1 March 2021.
What has emerged in the last 12 months is that there are some anomalies in the system, particularly in relation to the hire of goods.
For example, for a scaffolding company, there are two elements to the service provided: the activity of putting up the scaffolding is one, and then the ongoing hire of its use is the other. Putting up the scaffolding is part of the build, so is subject to the reverse charge. However, the ongoing hire isn’t.
Another example relates to concrete pumping. Is the pumping company pumping its own concrete or another provider’s? Is it an intrinsic part of the build (i.e. are they ‘laying the concrete’) or just providing a service (i.e. pumping concrete), in the same way an architect provides a service? If they aren’t an intrinsic part, then they aren’t subject to the reverse charge rules as, essentially, they are supplying a delivery service or an equipment hire.
And of course, this all then depends on whether the construction is a new-build. VAT doesn’t apply to new-build properties, but it does to construction work on existing buildings (such as an extension).
Clearly, the reverse charge is a maze and it is important to get it right. HMRC hasn’t made any changes, as sometimes occurs when new legislation is introduced. And, while it has initially adopted a softly, softly approach to non-compliance, now we are a year into the new regime, this is likely to change. Penalties for getting it wrong may be on the horizon.
To talk to the Optimum accounts team about the VAT Reverse Charge, please get in touch. We work with construction companies and sub-contractors in Swindon, Wiltshire, Cheltenham and Gloucestershire, to help them get their tax and their VAT right.