Domestic reverse charge: What does it mean for you?

HMRC is introducing a domestic reverse charge for construction services with effect from 1 October 2019. This measure is designed to combat fraud in the construction services supply chain. You need to understand your obligations and the potential implications this may have for you.

Who does it apply to?

The changes will affect you if you supply or receive supplies of building and construction services which are subject to the standard or reduced rates of VAT that also need to be reported under CIS. The reverse charge applies to:

• VAT registered building contractors, where they engage VAT registered sub-contractors
• VAT registered sub-contractors who engage others further down the supply chain

You will not be affected by the changes if you are an ‘End User’. You are an ‘End User’ if you:

• do not make onward supplies of construction services
• are registered for CIS as mainstream or deemed contractor because you carry out construction operations, or because the value of your purchases of buildings and construction services exceeds the threshold for CIS

What do you need to do?

You will need to prepare for 1 October 2019 by:

• checking whether the reverse charge applies to your sales, purchases or both
• reviewing your contracts to make it clear whether the reverse charge applies so that the parties understand their respective obligations
• making sure your accounting systems and software can deal with the reverse charge
• considering how the change will impact your cash flow
• making sure all your staff are familiar with the reverse charge and how it operates

Sub-contractors

Sub-contractors cannot simply assume that the reverse charge applies and not charge VAT. Consideration needs to be given to:

• explicitly confirming the contractor’s position, before agreeing not to charge VAT
• obtaining and confirming the validity of the contractor’s VAT number
• ensuring your invoices meet the requirement for supplies that are subject to the reverse charge

Contractors

Contractors need to implement processes and procedures to ensure that VAT is not incorrectly paid to sub-contractors. HMRC are likely to deny input VAT recovery where appropriate checks and controls are not in place. Consideration needs to be given to:

• explicitly agreeing with sub-contractors whether the reverse charge applies
• where VAT is correctly charged, it may be prudent to retain evidence to prove this
• where the reverse charge applies, the VAT needs to be accounted for through the VAT return
• VAT needs to continue to be charged at the appropriate rate to the final customer

Client case study

A client provides steel painting services on site at its own premises. Its contracts include an additional service of touching up the paintwork once the steel had been erected at the client’s site. This element of the service was reportable for CIS purposes. The client used sub-contractors to perform on the services of touching up the paintwork at the client’s site. These services were also subject to CIS.

Following our review we concluded that it is likely that the whole contract for the client’s painting services would be subject to the reverse charge. We are working the client to revise its contractual arrangements to ensure that the on-site painting services will continue to be subject to VAT. We are also assisting the client to implement processes and procedures to meet its reverse charge obligations as both a provider and recipient of reverse charge service.

How can we help?

We are assisting our clients by providing reverse charge health check reviews and providing advice to ensure our clients are ready for the changes and in a position to manage the associated risks. Our reviews cover:

• confirming whether the services you provide and receive are subject to the reverse charge
• reviewing and advising in relation to amending contracts, so that it is clear whether the reverse charge applies and the parties understand their respective obligations
• reviewing your internal processes and procedures to ensure they are robust enough to meet your obligations
• reviewing your invoicing arrangements to ensure they meet the requirements of the reverse charge
• advising on the VAT accounting requirements in order to account for reverse charge supplies
• advising in relation to the impact of the changes for your cash flow