The much delayed domestic VAT reverse charge for construction services came into effect on 1 March 2021.
The new regime is intended to tackle missing trader fraud in the construction sector and moves the obligation to account for VAT on certain construction services from the supplier to the recipient of the construction services.
The domestic reverse charge applies to supplies of certain construction services (broadly those services which fall within the Construction Industry Scheme) and associated goods by one VAT registered business to another VAT registered business where the recipient receives the supply in the course of its own construction business.
The domestic reverse charge does not apply where the recipient is the end user of the services or if the recipient is not registered for the Construction Industry Scheme.
In general, the domestic reverse charge applies to supplies between VAT registered sub-contractors and contractors, but not between contractors and clients. The regime may also apply to certain supplies made to property developers. HM Revenue & Customs has published a flowchart that can be used to determine whether or not the domestic reverse charge applies to a particular arrangement.
Where the domestic reverse charge provisions apply, the supplier does not charge VAT but instead issues a VAT invoice to the recipient of the supply stating that the supply is subject to the domestic reverse charge. The recipient then accounts for the VAT due on the supply on its own VAT return. The recipient may treat the reverse charge VAT as input in the normal way.
The operation of the domestic reverse charge requires the supplier of the construction services to determine whether it should charge VAT on the services, or whether the domestic reverse charge applies. In order to do this, the supplier will need to verify the status of the recipient. For new construction relationships this will best be done in the construction contract itself, with the recipient being asked to give a warranty about its status. For existing arrangements that now fall within the domestic reverse charge regime, the supplier should actively seek confirmation of the recipient’s status.
Understandably, a number of suppliers may be wary about not charging VAT on supplies of services. This may lead to some suppliers continuing to charge VAT in circumstances where the domestic reverse charge applies. If the recipient pays VAT in these circumstances, then the recipient is not able to recover that VAT as input VAT and will instead need to attempt to recover the sums from the supplier. Any person in receipt of construction services which is itself registered for VAT and the Construction Industry Scheme needs to carefully consider whether or not VAT should be being charged on services provided to it and be ready to challenge a supplier who is not operating the domestic reverse charge correctly.
Any organisation making or receiving supplies that are potentially within the domestic reverse charge regime needs to consider not only whether its accounting processes are adequate to deal with the regime, but also whether the contractual provisions it has in place are adequate to obtain the information required to make a correct determination of the VAT status of the supply made or received, and also to enable appropriate recovery from the other party in the event that an error has been made.
How can we help?
If you would like further information on the domestic reverse charge regime, please contact Ainsley Maclaren.