From 1 March 2021 there will be significant changes to the way VAT is accounted for by many businesses in the property and construction sectors.
- The party liable to account for VAT on construction services is changing, in many cases, from the supplier to the customer (the domestic reverse charge or DRC).
- The supplier must ensure it does not issue an invoice with VAT charged where these new rules apply.
- The customer must self-account for the VAT and then recover it on the same VAT return, subject to the normal VAT recovery rules.
- The measure is to combat fraud in the supply chain and there will be penalties for non-compliance.
I am a customer purchasing construction services: what does this mean?
It is important for the customer to communicate with suppliers during tendering and contracting processes to ensure correct VAT treatment.
- Customers must ensure they are not charged VAT erroneously, as incorrectly charged VAT is not recoverable from HM Revenue & Customs (HMRC). Customers could also be liable for penalties for incorrectly accepting VAT invoices from suppliers.
- Customers must have a process in place to identify and confirm ‘end user’ status. An end user is:
- A private individual;
- A customer who receives the services and does not resupply construction services;
- A customer who is not registered for CIS; or
- A customer who holds an interest in the land on which the work is taking place.
- Customers must advise of their end user status. If this is not confirmed the DRC must be applied.
- Customers need to understand when their status changes on a job to ensure suppliers are kept informed. If end user status is lost during a contract, then the supplier must change its invoice to meet the DRC requirements.
- There are many complexities in the supply chain that need to be considered. For example, is the developer also acting as main contractor on part of the site for a third-party landowner? This could change the invoicing and VAT treatment and may be difficult to track.
I am a supplier of construction services: what does this mean?
- Suppliers need to identify whether VAT should be charged on their invoices. This will depend on the position of the customer in the supply chain. If a customer is an ‘end user’ then the current VAT treatment still applies.
- If a customer is not an ‘end user’ then suppliers should invoice them without charging VAT, but must show the VAT that would have been due on the invoice to enable the customer to account for the DRC VAT on its VAT return.
- Processes need to be put in place to identify when and who to charge VAT to.
- You must be aware of what a ‘construction service’ is for these purposes: the law is widely drawn and largely aligned with the Construction Industry Scheme (CIS).
Temporary staff suppliers
- Supplies of temporary staff can fall within CIS.
- HMRC has confirmed that supplies of staff by employment businesses do not fall under DRC.
- However, businesses will need to understand whether they are actually supplying temporary staff (using the VAT definition of a supply of staff) or another construction service/operation, using the CIS definitions.
For help and advice
The VAT Team at Saffery is advising clients including FTSE 250 developers, large privately-owned contractors, property developers, law firms and landowners on how to prepare for the changes.
Those affected will need:
- Systems and processes for identifying the status of customers and suppliers, and appropriate documentation to support VAT treatment.
- To consider HMRC’s guidance and potentially liaise with HMRC on complex supply chains and ownership structures.
- To take a combined approach to ensure existing CIS controls and processes can be leveraged.
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