Legislation on VAT reverse charge for construction services

From 1 October 2019, a VAT reverse charge will take effect on certain building and construction services, along with materials which fall to be treated as part of a single supply of services.

What is happening?

The reverse charge is a mechanism to prevent the avoidance of VAT by suppliers who charge VAT from a recipient but do not account for that VAT to HMRC. The charge ‘reverses’ responsibility for the VAT from the supplier to the customer, meaning customers will be liable to account for the VAT to HMRC.

Why does it matter?

Recipients of construction services in a business to business context, where the recipient is not the final consumer, must not account to HMRC for VAT on the supply. Determining such VAT is likely to be complex as a single transaction can often comprise multiple suppliers and multiple supplies involving different VAT rates.

This represents a potentially significant financial and administrative burden as businesses must adapt their accounting systems to process reverse charge supplies and to make ongoing checks to ensure supplies and purchases are correctly treated. HMRC have also noted that the charge may reduce the cash flow available to some business, as they will no longer be able to use the VAT collected from customers as working capital before it is paid to HMRC.

Further, as liability now falls to the recipient, any debt action pursued by HMRC will be enforced against the recipient instead of the supplier. Recipients who breach the new rules could be subject to various penalties, introducing an extra level of risk for suppliers.

What action should you take?

1. Conduct a thorough overview of your current and future transactions to assess your exposure to the reverse charge.
   
   
2.  Review and adapt your accounting procedures and systems to be able to process the reverse charge and keep track of supplies and purchases.
   
   
3. Stay aware of the potential risks and penalties associated with the reverse charge, and consider introducing appropriate training for staff.