What is the VAT reverse charge?
The VAT reverse charge is a requirement that (except in certain circumstances mentioned below) any VAT registered contractor paying for construction services that are within the scope of the construction industry scheme ("CIS") must pay the VAT payable on those construction services directly to HMRC, instead of paying them to the contractor/subcontractor or supplier.
It is worth noting that payments can be within the scope of CIS even if they are not paid by construction businesses as other businesses with a high construction spend can also be caught by the CIS rules.
The aim of the VAT reverse charge on construction services is to ensure that the Government is recovering the correct amount of VAT from the construction sector. Similar reverse charge mechanisms have previously been introduced in other sectors such as the telecommunication services.
The main exception to the VAT reverse charge on construction services is that the charge will not apply if construction services are being provided directly to an "end user".
Who is an end user?
For the purposes of VAT reverse charge on construction services, end users are businesses, or groups of businesses, that are VAT and Construction Industry Scheme registered but who do not make onward supplies of building and construction services supplied to them. For example, occupiers, retailers, and landlords.
Similarly, intermediaries who are connected to an end user and who buy and re-supply construction services to that linked end-user are treated as end users (provided that such a supply is made without material alterations). An example would be a company procuring construction services for a member of its group and recharging those services to the actual end user.
However, is worth noting that being "linked" for these purposes goes beyond just connected companies and include intermediaries that have a "relevant interest" in the land occupied by the end user where the construction is to take place. This would include services procured by a landlord and then charged to a tenant of the same land.
Finally, it is important to note that the end user exception will only apply if the end user (or intermediary) notifies the supplier of the construction services that they are an end user in writing (an intermediary is treated as an end user for these purposes). Normally, such a notification will be included in the contract for the construction works.
In addition to end users, there are other exceptions from the new VAT reverse charge on construction services (please note that this is not an exhaustive list):
1. Supplies of construction workers only as part of an employment business (even if this is caught by the CIS);
2. Supplies that are zero rated for VAT purposes; or
3. Supplies where the reverse charge element of the supply accounts for 5% or less of the total value of the supply.
It is hoped that the new rules will ensure the correct tax is paid to HMRC, however, it is likely to have implications to a contractor/supplier's cash flow and there is also the administrative burden of changing the invoice procedure.