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Building and construction business houses- Are you prepared for VAT reverse charge?

Purpose

HMRC of UK will be introducing VAT reverse charge for specific Building and construction services meeting certain conditions to ensure there is no leakage of revenue to the Government on VAT from the “missing trader fraud” wherein such traders after collecting VAT from their customers fail to pay the VAT dues to the Government and go missing.

The proposed changes will shift the burden of payment of such VAT due amount to the purchaser as opposed to the seller so long as such purchaser himself is a VAT registered buyer for business purposes and they are not direct individuals. Such business entities would then be in a position to claim the input VAT amount against the payment made to the Government for the reverse charge.

Scope

The following conditions are required to be met for the VAT reverse charge: The Building and construction services should fall within the ambit of Section 74 of the Construction Industry Standards (CIS) and would include one of the following:

(a)Construction, alteration, repair, extension, demolition or dismantling of buildings or structures

(b) Any such above works forming, or to form, part of the land, including (in particular) walls, roadworks, power lines, electronic communications apparatus, aircraft runways, docks and harbours, railways, inland waterways, pipelines, reservoirs, water mains, wells, sewers, industrial plant and installations for purposes of land drainage, coast protection or defence.

(c) Installation in any building or structure of systems of heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection

(d) Internal cleaning of buildings and structures,

(e) Painting or decorating the internal or external surfaces of any building or structure

(f) Operations which form an integral part of, or are preparatory to, or are for rendering complete such operations as are previously described in this subsection.

Exceptions

There are certain exceptions to the reverse charge as detailed below:

Where the services are rendered to the common individual not doing business; in such cases VAT will be charged for the services

Where the services are rendered to an end-user even though he is VAT registered; for example, a business which is in manufacturing needs such services for one of their factory buildings where the service will not be passed on to another customer but retained for their business purpose. In such an instance the VAT will be charged on the end-user.

In this same example cited above if the service is provided by a subcontractor through the main contractor, the subcontractor will not charge VAT on his invoice to the main contractor who will apply the reverse charge of the applicable VAT amount, but when the main contractor raises his invoice on the end-user namely the factory he will charge the VAT amount on the subcontract value which will be claimed as input VAT by the end-user.

Reverse charge treatment in VAT returns

The supplier will raise the invoice as Zero-rated VAT and show the wording such as “Reverse-Charge, Customer needs to pay the VAT to HMRC”

The supplier will not add any output VAT to the VAT return nor show it in box 1 and the sale will be entered in box 6 of the return.

In the case of a customer, he will calculate the deemed output VAT, enter in the box 1 of the return though he will not enter any value for the transaction in box 6 of the return. The customer will treat it as a normal purchase adding the value of the invoice in Box 7 besides accounting for the deemed input VAT and adding to Box 4.

Considering all the above aspects the reverser charge effect will have to carefully considered by the various parties involved in such transactions and all necessary changes will have to be taken care of concerning bookkeeping, invoicing filing of returns and so on. The business will have to evaluate and ensure that they have proper software in place to handle such issues.

A supplier will have to check if they have to include VAT in their invoices or if the reverse charge will be applicable in which case the invoice has to highlight this aspect. HMRC has laid the onus on the supplier to identify the client status by verifying their VAT and CIS status and to take suitable action accordingly.

Since these are complex issues, it would be prudent for business houses to examine all aspects carefully, seek advice where required and take appropriate action to avoid unwanted complications and notices from HMRC.

The proposed which was originally scheduled to begin from October 2019 has now been extended by a further 12 months.