Construction and the Reverse Charge

Les Howard focuses on potential changes to the Reverse Charge for the construction sector

HMRC have been consulting on the extension of the Reverse Charge procedure to the construction sector. S55A was first introduced with effect from 1 June 2007 to address the widespread missing trader fraud in computer chips and mobile telephones (you will have heard of MTIC fraud, and this was a key plank in HMRC’s response to it).

S55A(13) includes a comment: “The Treasury may by order make such amendments of any provision of this Act as they consider necessary or expedient for the purposes of this section or in connection with this section.” This wording indicates that the existing list of goods and services is not final. In fact, the Explanatory Memorandum (para 7.3) provides a fuller history, as emissions allowances, gas and electricity, and electronic communications have been added to the listed of affected supplies.

The major mischief being targeted is obvious. A contractor undertakes taxable construction work, charging the main contractor VAT at 20%. The contractor fails to pay the VAT output tax due, and disappears, while the main contractor recovers the input tax. HMRC are left with the losses. While this is not new, HMRC seem to suggest growing fraud in the sector.

The Reverse Charge is used elsewhere in VAT, principally in relation to cross border supplies of services. For example, a UK professional invoices a business customer in continental Europe. In most cases, his supplies fall within the so-called General Rule. He does not charge VAT. The supplier accounts for output tax at the rate applicable in the member state in which he is located. He then claims the same amount as input tax. This avoids the need for a mechanism for claiming non-local VAT. There are certain formalities to be reported too, such as the use of an EC Sales List, so that VAT authorities can monitor such supplies. This means that many accountants are familiar with the concept of Reverse Charge and will be equipped to help contractors implement the new scheme.

In relation to intra-UK construction services, the process, at first sight, actually appears easier. Appearances can be deceptive!

Within the construction sector, supplies may be made at any of three VAT rates: 0%, 5% and 20%. A single project may include all three. HMRC will disallow VAT if charged at a rate which is too high. HMRC will also assess a contractor where he charges VAT at too low a rate. One wonders how forgiving HMRC will be when a contractor ‘charges himself’ VAT at the wrong rate and then reclaims it! The sector will welcome comment from HMRC on this point.

The Reverse Charge will apply to most, but not all, services that fall into the definition of ‘construction’. Section 6 of the draft Statutory Instrument contains the lists of included and excluded supplies. I suspect this is one area that will change while the SI is in consultation, such that more services will be included.

The practical outworking is that the main contractor, the recipient of the services, will be required to identify any ‘excluded’ services. Such services will fall outside the Reverse Charge rules, so the sub-contractor will be required to charge VAT at the appropriate rate. The sub-contractor will also be required to do the same exercise. I fully expect this to create some disputes!

The Reverse Charge will only apply to supplies where the customer is another ‘construction business’. So, where a main contractor’s customer is a householder, or business organisation in another sector, the Reverse Charge will not apply.

There is also a ‘connected party’ rule, where a contractor makes supplies of construction services to a “connected party”, as defined by s1161 of the Companies Act 2006.

Many main contractors use the Self-Bill­ing scheme. This provides that the main contractor produces the sales invoice on behalf of the sub-contractor. I think that this procedure can assist with the Reverse Charge. This is because the main contractor already holds details of his sub-contractors. The main contractor probably has better resources to accu­rately determine the correct VAT rate(s) for the work carried out. Similarly, he will also have resources to determine wheth­er the services fall within the Reverse Charge provisions. He can therefore pro­vide the correct documentation with the correct VAT liability and Reverse Charge wording and do it on time. I am already speaking to a number of contractors to help them introduce processes to enable them to do this.

You can find draft legislation and other material on the HMRC website here:

Les Howard is a partner in vatadvice. org, a specialist VAT practice based in Cambridgeshire. He has over 30 years’ experience in VAT, including a short spell with HMCE (as it then was). As well as assisting businesses and charities with VAT issues, he lectures on VAT and sits on the Tax Tribunal