Tax: Construction industry reverse charge

Suppliers and customers likely to be affected by the charge should ensure they are prepared well in advance of next October

Author: Robert J. Walker

11 January 2020

Those involved in construction may have been relieved to hear of the delay in introducing the construction industry reverse charge (CIRC), which had been due to take effect from 1 October 2019, but has now been pushed back a year.

The stated aim of the CIRC is to combat perceived high levels of fraud in the industry by making customers account to HMRC for any VAT due on specified services rather than have suppliers do so, as now. This is intended to mirror the Construction Industry Scheme (CIS), in which customers deduct tax from payments to suppliers and pay HMRC those amounts.

The CIRC will need to be applied when:

  • both parties are registered for UK VAT
  • the recipient is registered for CIS
  • the service is liable to VAT at the reduced or standard rate
  • the service is defined as construction operations for the purposes of CIS, which includes construction as well as alteration, repair, extension, painting and decorating, demolition, civil engineering and certain installations such as lighting systems
  • it is not being supplied to an end user.

The exclusion for end users is important because it means that the reverse charge need not be applied when the supply is to – for example – a property owner or a main contractor that sells or leases a newly constructed building.

Businesses that supply specified services to connected parties in a corporate group structure or to those with a common interest in land will not be subject to the charge, and neither will supplies between landlords and tenants. In those circumstances, the normal VAT accounting rules will apply, and the supplier will continue to account for it.

However, where a supply does fall under the conditions referred to above, on or after 1 October 2020, the customer will have to account for VAT under the CIRC on its VAT return, rather than paying this on its supplier. The customer will be able to reclaim the VAT as input tax on the same return – so this should have no negative cash flow implications for the customer – subject to the normal input tax rules.

The supplier is still required to issue a valid VAT invoice, but must also include a statement clearly identifying it as subject to the CIRC. VAT will need to be calculated on the gross amount payable for the services, so that any deductions under the CIS should not be made from the taxable amount for the purposes of calculating the reverse charge.

If they had not already made preparations for the intended start date of 1 October 2019, suppliers and customers who are likely to be affected should ensure they do so well in advance of next October. Suppliers of specified services will need to take steps to ensure that they gather information, such as VAT registration numbers evidence in respect of CIS and confirmation of end user status, at an early stage to ensure that contracts reflect each party's requirements in respect of who accounts for VAT.

Suppliers may need to factor in the change to any cash-flow projections, given that affected payments received will no longer include the VAT element. Previously, this would not have been payable to HMRC until a later date, meaning that suppliers could lose a cash-flow advantage of up to 90 days. Alternatively, the change may mean that suppliers will be in a repayment position, because all or most of their supplies will fall under the reverse charge. In this case they could consider changing to monthly returns to support their cash flow.

Suppliers will also need to ensure that their systems are adequately configured to record amounts receivable as net of VAT, which will need to be accounted for by their customers under the CIRC. Conversely customers' accounts payable teams will need to understand that only net amounts are paid to suppliers of specified services.

While it is expected that HMRC will take a light touch with supplies made under the CIRC scheme for an initial period of six months, it is strongly recommended that suppliers and customers are prepared for this significant change.

Robert Walker is partner and real-estate tax UK network leader at PricewaterhouseCoopers LLP

Related competencies include: Capital allowances Taxation

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