HMRC have recently published draft legislation for a consultation which considers introducing a domestic reverse charge to certain supplies of construction services as an anti- fraud mechanism. The measure was initially proposed in the 2017 Spring Budget and HMRC estimates that it will save about £100 million per year of tax leakage. The consultation runs until 20th July 2018 and the legislation is expected to be enacted later in the year with the regime coming into effect from 1st October 2019.

What this means is that for certain supplies of standard or reduced rate construction services (‘specified services’) the recipient will be liable to account for the VAT to HMRC instead of the supplier.  It is expected that the primary supplies to be affected will be those between construction or building businesses. The supplies that will probably fall within the scope of the new reverse charge are broadly similar to the construction services defined as “construction operations” in the Construction Industry Scheme (CIS).  Consequently, subcontractors and contractors enrolled on the Construction Industry Scheme will be particularly affected by the proposed rules.

Specified supplies made to customers who are consumers, or to businesses that will use the specified supplies to make other supplies such as housing are out of scope of the proposed legislation.  The rules will not apply to zero-rated supplies of construction services.

This measure, aiming to crack-down on missing trader fraud, sits in harmony with current practices in the construction sectors of most other EU Member States. The use of the mechanism has proved successful for other fraud sensitive areas including wholesale supplies of telecommunication services, and goods such as mobile phones and computer chips.

HMRC is expected to publish further guidance providing information on the construction industry reverse charge so that businesses might be able to adapt their business practice in time.

Impact on Business

The changes will affect many small and medium sized businesses in the construction and building sectors, who will have to manage cash flow differently and make changes to accounting /IT systems to ensure compliance with the reverse charge reporting requirements.

Please do contact us if you would like to discuss the above developments further.

By |July 9th, 2018|