Builders will soon be required to charge themselves VAT.
HMRC has published an important new draft Statutory Instrument (SI) for technical consultation with a draft explanatory memorandum and draft tax information and impact note. The new rules are likely to be introduced in the autumn.
This sets out more details of the intended Reverse Charge (RC) for construction services. The draft legislation will make supplies of standard or reduced rated construction services between construction or businesses subject to the domestic RC, which means that the recipient of the supply will be liable to account for VAT due, instead of the supplier.
What supplies does the intended legislation cover?
The RC will apply to, inter alia:
- construction, alteration, repair, extension, demolition or dismantling of buildings or structures
- work on; walls, roadworks, electronic communications apparatus, docks and harbours, railways, pipe-lines, reservoirs, water-mains, wells, sewers, or industrial plant
- installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection
- internal cleaning of buildings and structures, so far as carried out in the course of their construction, alteration, repair, extension or restoration
- painting or decorating the internal or external surfaces of any building or structure
- services which form an integral part of the services described above, including site clearance, earthmoving, excavation, tunnelling and boring, laying of foundations, erection of scaffolding, site restoration, landscaping and the provision of roadways and other access works.
What is not covered?
These are some supplies which are not covered by the draft SI
- drilling for, or extraction of, oil or natural gas
- extraction of minerals and tunnelling or boring, or construction of underground works, for this purpose
- manufacture of building or engineering components or equipment, materials, plant or machinery, or delivery of any of these things to site
- manufacture of components for systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, or delivery of any of these things to site
- the professional work of architects or surveyors, or of consultants in building, engineering, interior or exterior decoration or in the laying-out of landscape
- signwriting and erecting, installing and repairing signboards and advertisements
- the installation of seating, blinds and shutters or the installation of security.
Please note that neither of the lists above are exhaustive.
Further details
The rules do not apply to supplies to the end user (consumer) eg; retailers and landlords, but rather to other construction businesses which then use them to make a further supply. There are no de minimis limits, but the RC will not apply to associated businesses.
Deadline
Before these new rues come into effect, HMRC have asked for comments before 20 July 2018.
Why the new rules?
Briefly, the SI is intended to avoid Missing Trader Fraud (MTF). The rules avoids suppliers charging and being paid VAT, but failing to declare or pay this over to the government. HMRC has identified the building trade as an area where there has been considerable tax leakage in the past.
Technical
As a general rule, it is the supplier of goods or services who is required to account for VAT on those supplies. However, the VAT Act 1994, section 55A requires the recipient, not the supplier, to account for and pay tax on the supply of any goods and services which are of a description specified in an order made by the Treasury for that purpose.
Action
It is prudent to check whether you, or your clients’ businesses will be affected by the intended SI. If so, plans need to be put in place; whether as a supplier or recipient, to ensure that VAT is not charged incorrectly (supplier) and the RC is applied correctly (recipient). It is likely that output tax incorrectly shown on an invoice will be due to HMRC, but will not be recoverable by the recipient and the omission of levying the RC will lead to penalties.
Please contact us if you have any queries or require further information.