Following two delayed starts, the VAT reverse charge on construction services is due to come into effect from 1 March 2021.

Designed as an anti-fraud measure, the reverse charge will require the recipient of supplies of relevant building and construction services to account for the VAT, rather than the supplier.

Businesses that supply or receive building and construction services will need to carefully consider whether they fall within the new rules and understand the impact on their invoicing processes and cash flows. 

The reverse charge can apply to ongoing works under contracts entered into prior to 1 March 2021, meaning that VAT accounting processes may need to be changed part way through a project.

The types of services that fall within the new rules are essentially the same as those that currently fall within the scope of “construction operations” under the Construction Industry Scheme (or “CIS”).  Materials supplied as part of the supply of relevant construction services will also be included.

In outline, the reverse charge applies where a VAT registered business supplies relevant building and construction services to a VAT registered business customer who:

• is registered (or required to be registered) under the CIS; and
• has not confirmed in writing to the supplier that it is an “end user” or “intermediary supplier”.

It follows that where the recipient is not required to be registered under the CIS, the VAT reverse charge will not apply.  However, it is worth noting that the registration threshold for “deemed contractors” under the CIS is expected to change from 6 April 2021. The new approach will involve a rolling review that will trigger a registration requirement where there is more than £3m of relevant expenditure in any 12 month period. This may make it more likely that a customer’s CIS status could change and (if no other exceptions apply) result in the VAT reverse charge kicking in part way through a construction project. 

The exception for “end users” switches off the reverse charge where the recipient uses the construction services for its own purposes as the final consumer. The same treatment applies for recipients who are “intermediary suppliers”, for example a group procurement company that contracts for construction services and simply recharges them to the group member who requires them, or a landlord who procures works on behalf of its tenant. The key point to note in both cases is that the exception applies only where the recipient has provided written confirmation of its “end user” or “intermediary supplier” status before the time of the relevant supply.

The requirement for written confirmation of “end user” or “intermediary supplier” status means that a customer may effectively be able to choose whether the reverse charge applies. In some cases, choosing to self-account for VAT under the reverse charge (rather than paying VAT to the supplier) could have cash flow benefits for the customer and this should carefully be considered before any status confirmation is provided.

Although HMRC have suggested that they will initially take a “light touch” approach to errors under the new regime, suppliers and consumers of construction services will need to make sure they are properly prepared. 

Accounting systems and software need to be checked, compliance processes need to be put in place to confirm the status of customers, and appropriate invoices stating that the reverse charge applies will be required. Ultimately, if a customer incorrectly pays VAT to a supplier when the reverse charge should have applied, the amount will not properly be recoverable as input VAT.