HMRC consultation on draft legislation for new domestic reverse charge on certain construction services
carolineheath 20 June 2018 No comments
HMRC has opened a consultation on draft legislation for a VAT domestic reverse charge on certain construction services. The draft statutory instrument together with a draft explanatory memorandum and draft tax information and impact note are available here.
Who should be interested in the consultation?
The consultation will be relevant to sub-contractors and contractors carrying out supplies reported through the Construction Industry Scheme. The aim of the technical consultation is to test whether the scope and definitions are understood and achieve their objective, and that estimates of the impacts are reasonable.
Why is the domestic reverse charge being introduced in this sector?
The measure is intended to remove the opportunity for fraudsters to charge VAT and then go missing before paying it over to the tax authorities, known as missing trader fraud.
Construction services have been targeted by criminals because labour-only suppliers in the sector do not incur any significant VAT on their costs but can charge VAT to customers and then go missing, keeping the VAT for themselves.
The risk of fraud in the construction industry is principally centred around the supply of construction services between construction businesses in the supply chain. The new legislation will not therefore require other types of business to apply the reverse charge when receiving construction services and there is also no reverse charge requirement in relation to building and construction materials that are supplied separately and independently of construction services.
Reverse charge accounting makes it impossible for fraudsters to perpetrate missing trader fraud because the customer rather than the supplier accounts for the VAT direct to HMRC.
What supplies will the domestic reverse charge apply to?
The legislation will make supplies of standard or reduced rated construction services (‘specified supplies’) between construction or building businesses subject to the domestic reverse charge.
The legislation will not apply to specified supplies made to customers who are consumers, or to those that use specified supplies to make other supplies, such as those selling new houses.
The consultation closes on 20 July 2018.
Interested parties may also want to read the outcome of HMRC’s consultation on using VAT and other policy options to tackle fraud in the provision of labour in the construction sector.
The legislation will be introduced under powers in section 55A of the VAT Act 1994 and a final version of the draft order and guidance will be published before October 2018.
The introduction of the reverse charge in this sector means that businesses will need to adapt their systems and manage their cash flow differently. Businesses affected by this change should look out for the publication of HMRC’s guidance which will provide the information they need to be able to adapt their accounting systems to comply with the measure.
The legislation will take effect on 1 October 2019.