Will you have to pay reverse VAT?
VAT fraud is acknowledged as a problem in the Construction sector – across the UK, 8.9% of VAT due goes uncollected.
Almost £500m of this is attributed to “missing trader fraud”. Criminal gangs take control of or start construction supply companies. They then supply services to customers, charging them VAT which is never accounted for.
The Government’s proposed response to this is “Reverse VAT” – in essence, the customer is obliged to account to HMRC for the VAT and not the supplier. This applies all the way up the supply chain, until the customer being supplied is not a construction business. At that point usual VAT rules apply.
The White Paper setting out the proposed legislation was released in June, our analysis is below.
October 2018 – Legislation to be published.
1 October 2019 – Legislation in force, will apply to supplies made from that date onward.
What does the Legislation say?
The Value Added Tax (Section 55A) (Specified Services and Excepted Supplies) Order 2019 is a very brief order which effectively puts section 55A of the VAT Act 1994 into force and specifies certain services which are subject to and exempt from reverse VAT. Section 55A sets out the mechanism for reverse VAT.
Essentially, the recipient of taxable goods (in this case construction goods & services) is obliged to account for and pay VAT on the goods supplied as if they had made the supply themselves. Identical enforcement provisions apply to recipients under this VAT scheme as apply to suppliers normally. Penalty fines, interest on late payment and other HMRC measures all apply, although (as will be seen later in this article) a lighter touch approach will be taken initially.
Where the recipient is not a company providing construction services further down the chain, usual VAT provisions apply – VAT is included on the invoice and is chargeable by the supplier, who must account to HMRC.
Who will be affected?
All VAT-Registered construction businesses supplying construction goods and services to non-consumers.
Construction services are defined, as in the Construction Industry Scheme, as any one of demolition, site preparation, building work, alterations, repairs and decorating, installing systems for heating, lighting, power, water and ventilation and cleaning the inside of buildings after construction work.
Companies supplying solely goods for use in construction will not be affected.
Small and medium-sized firms, using VAT collected but not yet paid as working capital, may find this difficult. The Administrative burden on VAT will shift to an input-only burden, which will nonetheless still need retraining of staff and adoption of new accounting and invoicing processes.
To cushion the effects on these firms the legislation will have a year’s lead-time. HMRC will also provide support and guidance for all businesses who could be affected by the reverse charge during the one year lead in period. HMRC will also operate a ‘light touch approach’ to any genuine mistakes for 6 months following introduction (until 31 March 2020).
VAT on construction services supplied to consumers will be payable in the usual way, meaning that companies both receiving construction services and supplying construction services to consumers will face a double burden of VAT which will need to be accounted to HMRC. Whilst this will not have a direct impact on profits, turnover will be boosted along with the element of working capital consisting of VAT collected but not yet paid.
This method of VAT collection will already be familiar to businesses supplying computer chips, mobile phones and emissions allowances.
Are there any exceptions?
Services supplied to someone who does not then supply further construction services are exempt. That is, services which are supplied to a customer who is not a contractor or sub-contractor.
The following are also exempt:
- Supplies made to A, who then supplies them to B (a connected person such as a relative)
- Supplies made to tenants or landlords in relation to land/property/engineering works which are rented, leased or licensed
- Supplies not exceeding £1,000 per month (exclusive of VAT)
Consultation on this bill remains open until 20 July 2018, so there is still time to submit points to HMRC for their consideration. HMRC have produced the Draft Legislation. It contains a tax information note and you are able to respond to the consultation.
If you would like to discuss any issues raised in this blog, please get in contact.