Kangs Solicitors regularly acts for businesses in the building and construction sector in relation to a wide range of HMRC related matters including advice on HMRC compliance visits, VAT Assessments and Appeals to the Tax Tribunal.

On 1 March 2021 the much-awaited (and twice delayed) VAT Domestic Reverse Charge for building and construction services was introduced.

Hamraj Kang of Kangs Solicitors outlines some of the issues surrounding the new reverse VAT charge regime and explains the rationale for its introduction.

The team at Kangs Solicitors is highly accredited for advising corporate and individual clients in relation to every aspect of HMRC civil tax and VAT investigations.

The team is led by Hamraj Kang who is ranked as a ‘star individual’ for financial crime investigations by the leading legal directory Chambers & Partners.

For an initial no obligation discussion, please call our VAT Team at any of our offices detailed below:

What Is The VAT Domestic Reverse Charge? | Kangs VAT Solicitors

The VAT Domestic Reverse Charge changes the way VAT is accounted for and handled from 1st March 2021 for certain types of construction supplies and services.

In effect, the supplier of the construction services will no longer receive the VAT element of its supply invoice and will therefore not have to account for it to HMRC. The customer will not pay any VAT to the supplier but instead account for it directly to HMRC. There are exceptions to this general rule which are outlined below.

Why Is The VAT Domestic Reverse Charge Being Introduced? | CIS Solicitors

The change is essentially an anti-fraud measure. HMRC regards the construction sector as particularly vulnerable to large scale VAT fraud with many examples of ‘defaulting’ or ‘missing’ traders featuring in the sector.

The VAT Domestic Reverse Charge applies to transactions attracting the current VAT rates of 5% or 20%. It is hoped that by placing the onus on the customer to account for the VAT, rather than the supplier, the instances of suppliers becoming ‘defaulting’ or ‘missing’ traders who fail to account for the VAT element of the transaction will be reduced.

HMRC has clearly been influenced by the relative success of other similar VAT reverse charge schemes which have been applied to other sectors that were prone to large scale VAT fraud, such as the computer processing unit and mobile telephone sectors.

Who Will Be Affected By The VAT Domestic Reverse Charge?

The VAT Domestic Reverse Charge is sector specific as it only applies to the construction industry and then only to VAT registered businesses which are both working under the Construction Industry Scheme (‘CIS’).

In practical terms, many supplies between contractors and sub-contractors will be caught by the new provision.

The CIS was introduced to combat direct tax fraud in the form of fraudulent evasion of income tax and national insurance contributions. The new VAT Domestic Reverse Charge is seen as an extension of the CIS to combat indirect tax (VAT) fraud.

The VAT Domestic Reverse Charge will apply where all of the following conditions are met:

  • the supply is of construction services and/or materials between two VAT registered businesses (customer and supplier), and
  • the transaction attracts VAT at the current reduced rate (5%) or standard rate (20%), and
  • both businesses are registered for the CIS,
  • the customer is not the end user but intends to make a further supply of construction services or materials to a third party, and
  • the customer and supplies are not connected companies or landlord/tenant.

Exceptions To The VAT Domestic Reverse Charge | Kangs CIS Solicitors

The VAT Domestic Reverse Charge will not apply where the:   

  • supply is to the end user,
  • customer is not registered under the CIS,
  • customer and supplier are connected companies or are landlord/tenant,
  • supply is zero rated,
  • customer is not VAT registered.

In the above situations, the normal VAT rules will apply and the supplier will still have to include VAT on its invoice and account for it in the monthly/quarterly VAT Return in the usual way.

What Are The Practical Consequences Of The VAT Domestic Reverse Charge?

  • Cashflow is likely to be affected due to the supplier not receiving the VAT element of the invoice and being able to make use of it as ‘working capital’.
  • Conversely, there will be a cashflow benefit to the customer who will now have access to the VAT element for an additional one month or one quarter.
  • Businesses may look to move to monthly instead of quarterly VAT Returns to ease cashflow concerns.
  • A business may become ‘repayment traders’ as a result of the VAT Domestic Reverse Charge due to the fact that it will not receive VAT on its sales but will still pay VAT on other business expenses. This will mean the business will make a repayment claim from HMRC each month/quarter in its VAT Return.
  • Businesses will need to update their accounting software and ensure invoices clearly reflect that the reverse charge has been applied.

Labour Supply Agencies | VAT & CIS Solicitors For Construction Industry

The VAT Domestic Reverse Charge does not apply to labour supply agencies if the business is responsible for paying the temporary workers.

The key issue is that the workers are employed by the agency and not directly by the construction business. As such, the employment business is not considered to be a building or construction service for the purposes of VAT.

How Can We Help? | Kangs VAT Expert Solicitors

It is important that businesses complete VAT Returns accurately and have a robust invoicing system in place to deal with the new Reverse Charge procedures.

HMRC has indicted that a light touch regulation approach will be taken in the early stages of the Reverse Charge scheme provided that any errors discovered are found to have been made in good faith and not as a result of dishonest or deliberate fraudulent activity.

Clearly, businesses will face VAT audits and compliance visits from HMRC which may result in the raising of VAT Assessments and VAT Penalties.

We have considerable experience in representing businesses in VAT disputes and negotiations with HMRC.

We can assist with the following:

Who Can I Contact? | Kangs HMRC & VAT Fraud Investigation Solicitors

We welcome new enquiries by telephone or email.

Our team of lawyers is available to meet at our offices in London, Birmingham or Manchester or, alternatively, we are happy to arrange an initial no obligation meeting via telephone or video conferencing.

For initial enquires please contact:

Hamraj Kang
hkang@kangssolicitors.co.uk
07976 258171 | 020 7936 6396 | 0121 449 9888

Tim Thompson
tthompson@kangssolicitors.co.uk
020 7936 6396 0121 449 9888

John Veale
jveale@kangssolicitors.co.uk
0161 817 5020  | 020 7936 6396 07989 521 210