Reverse Charge for Construction Services – Some Early Complexities

After the introduction of the domestic reverse charge for construction services on March 1, 2021, many construction companies will prepare their first VAT returns under the new regime.

Alistair Duncan

Based on our experience in advising construction customers, a seemingly simple change presents companies with major challenges.

In summary, according to these new rules, a company with VAT registration that supplies certain construction services that fall within the scope of the construction management system (CIS) for onward delivery to another company with VAT registration must issue a VAT invoice stating that the service is subject to the domestic reverse charge.

As a result, the customer will have to settle the VAT due rather than paying the VAT amount to the supplier after receiving a VAT invoice.

If the customer does not continue to perform the construction work but is the “end user” of the services, it is the customer’s responsibility to confirm that normal VAT rules apply.

However, this does not release the supplier from the responsibility to ensure that the correct VAT treatment is applied.

Since the reverse fee only applies to standard and discounted services, construction suppliers still need to determine where their supplies are rated zero.

At Anderson Anderson and Brown (AAB) we have seen some suppliers who, when advised that their customer is the “end user” and that the delivery is subject to a normal VAT return, incorrectly apply VAT on their construction work with a face value of zero have applied. This creates a problem for the customer as he is not entitled to reclaim incorrectly calculated VAT.

Another area that has created confusion for construction companies is having a subcontractor entering into separate contracts for materials and installation services with the same customer.

Although a material-only delivery is not covered by the reverse charge, the deliveries under these two separate contracts will be delivered at the same time and location for VAT purposes and will be treated as a single delivery.

If this delivery falls within the scope of the CIS, the delivery also falls within the scope of the chargeback. If the supplier tries to split these supplies and not apply the chargeback, this in turn could result in an incorrectly calculated sales tax.

The domestic reverse charge doesn’t just apply to UK based suppliers and customers. Our customers have issues where one of the parties to the delivery is not a UK company.

If the subcontractor is registered as a non-resident taxpayer because it does not have a permanent establishment in the UK, provided the customer is a UK based and VAT registered company, the rules on the place of VAT for services will prevail. Whether or not they are made available to an end-user, these works are covered by the reverse fee for imported services and in each case the customer takes into account the VAT due.

However, if the customer is also not based in the UK, the supplier will need to check whether normal VAT rules apply, for example if the customer is an end consumer or is not subject to VAT.

If the customer is subject to VAT, the services fall under the CIS and the services continue to be provided, the supplier must alternatively levy the domestic reverse fee for construction services.

This is just one example of the problems we’ve seen in the short time since the new Reverse Charge was introduced.

Although HM Revenue and Customs has indicated that a “light touch” will be applied when reviewing the changes, this will be an area where visiting officials will focus their attention going forward.

Construction companies should ensure they understand the new rules and have procedures in place to determine when to apply VAT and when to apply the reverse charge.

We recommend seeking appropriate professional advice if you have any concerns.

If you have any questions, please contact Alistair Duncan, Indirect Tax Director at AAB.