VAT reverse charge on construction services

Update September 2019: the Construction Services Domestic Reverse Charge has been postponed until 2020.

Iain Masterton, Chiene + Tait’s VAT Director, highlights a change to VAT for the construction industry – the VAT reverse charge. The following article outlines what the changes will mean.

The UK Government recently announced a new measure designed to reduce VAT fraud in the construction industry.  It is a similar ‘reverse charge’ measure to one introduced a number of years ago for high value goods such as mobile phones. The reverse charge will be introduced from 1 October 2019 and will have an impact on businesses in the construction industry.

What is a reverse charge?

The reverse charge is a mechanism for accounting for VAT where no VAT is levied on a supply by the supplier, but the customer charges themselves VAT. The reverse charge was used in the past to combat missing trader fraud on items such as mobile phones. As the reverse charge makes it the customer’s responsibility to account for VAT, there is less chance that a supplier can receive VAT from a customer and then not pay the VAT to HMRC, with the VAT payment effectively ‘going missing’. See below diagram that outlines this process.

VAT Reverse Charge Construction Services

What is the practical affect?

If you are a contractor and are providing a qualifying service to another contract you will raise an invoice without VAT to your customer.  We expect that the legislation will require a small narrative on the invoice to confirm that the reverse charge will apply.  By not charging VAT this will not affect the supplier’s VAT recovery position.  The value of the supply will be recorded on Box 6 (TotalSales) of the VAT return.  Assuming the invoice was for £1000, the purchaser will account for £200 VAT in Box 1 of his VAT return and then recover the same amount in Box 4.  The result will be the same as before, however as the purchaser is not paying over VAT there is less risk that a fraudulent supplier could disappear with the VAT before paying it to HMRC.

What construction services are affected?

This reverse charge will only apply to specific construction services to other businesses in the construction industry.

What construction services are included?

The services that will be included in the measure are:

  • Construction, alteration, repair, extension, demolition or dismantling of buildings or structures (whether permanent or not), including offshore installations; construction, alteration, repair, extension or demolition of any works forming, or to form, part of the land, including 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;
  • Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection;
  • Internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration;
  • Painting or decorating the internal or external surfaces of any building or structure;
  • Services which form an integral part of, or are preparatory to, or are for rendering complete, the services described above including site clearance, earthmoving, excavation, tunneling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.

The reverse charge will only apply to construction services that are normally subject to the standard rate and reduced rate of VAT. The reverse charge will also apply to building materials supplied with those construction services.

What supplies are excluded?

The following are not included within the definition of construction services:

  • Drilling for, or extraction of, oil or natural gas;
  • Extraction (whether by underground or surface working) of minerals and tunneling or;
  • Boring, or construction of underground works, for this purpose;
  • Manufacture of building or engineering components or equipment, materials, plant or;
  • Machinery, or delivery of any of these things to site;
  • Manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site;
  • The professional work of architects or surveyors, or of consultants in building,engineering, interior or exterior decoration or in the laying-out of landscape;
  • The making, installation and repair of artistic works, being sculptures, murals and other works, which are wholly artistic in nature;
  • Signwriting and erecting, installing and repairing signboards and advertisements;
  • The installation of seating, blinds and shutters;
  • The installation of security systems, including burglar alarms, closed circuit television and public-address systems.

The measure will only apply to businesses that are supplying their construction services to another business, that will sell on these construction services. It does not apply where the construction services are provided to a consumer or connected businesses where the normal VAT rules will apply.

Is there anything contractors should do now to prepare?

HMRC are still finalising the final draft of the legislation, but the new law will be introduced from 1 October 2019. There will be a “light touch” from HMRC in the first 6 months which will allow for genuine mistakes.

All construction businesses need to consider if they will be impacted by this change and identify which services to other contractors will be covered. Changes will need to be made to accountancy packages to enable these transactions to be treated correctly from a sales and purchasing perspective.

If your business might be affected by this change and you would like to discuss this further please do not hesitate to contact our VAT Director Iain Masterton at vat@chiene.co.uk or call 0131 558 5800.

Construction Firms Missing Out on R&D Tax Relief

Construction firms are missing out on millions in available tax incentives. A recent HMRC study showed that there has been a lower-than-expected take up of Research & Development Tax Relief (R&D) in the sector.

R&D tax relief (further info can be found here) is one of the most generous corporation tax breaks available, designed to encourage innovation and increase spending on R&D activities. It provides vital funds that help cash-tight companies to keep the lights on and pay suppliers. £100k of qualifying expenditure under the SME scheme can get you either:

  • £230k worth of enhanced losses (worth £44k @ 19% tax rate); or
  • A £33.35k tax credit (cash in hand)

The construction sector is innovative by nature. Modern methods of construction & Building Information Modelling (BIM) have led to the development of new ecological and sustainable technologies that are used day-to-day in the sector. There was surprise therefore when the study showed that construction accounted for less than 3% of all R&D claims submitted.

The lower-than expected figures can likely be explained by a lack of awareness of the R&D Tax Relief in the sector, along with concern that the work undertaken does not qualify. There is also a misconception that R&D tax relief is only available for technology start-ups or scientists in lab coats. This is just simply not the case.

Where Companies are adapting equipment, creating new processes or developing better, safer or greener methods of construction, they will almost certainly be undertaking R&D.

Chiene + Tait has a specialist R&D team that can help identify what can and cannot qualify for relief. In the past 24 months, we have successfully submitted over 80 R&D tax credit claims resulting in over £2.5 million being received by our clients, achieving a 100% success rate.