The domestic reverse charge for construction services was due to come into force in October 2019 but has been delayed to October 2020. If you're not quite sure what this means for your construction company or your suppliers, then here's a little explanation about where the change has come from and what advice to seek to make sure you're complying.
The domestic reverse charge essentially means that the end customer, who is VAT registered, pays any VAT due. Charges apply only to supplies between VAT-registered suppliers and VAT-registered customers. If you are supplying goods, VAT is neither charged (i.e. 0%) nor collected on the affected supplies. Instead, the end customer accounts for VAT on their own VAT return, as both a sale and a purchase. This simply leaves no VAT for the supplier to claim and disappear with.
The reverse charges have been implemented in a number of forms designed to protect the revenue and are a consequence of significant VAT losses experienced by HMRC and Tax Authorities across the EU. The VAT domestic reverse charge is explained in Notice 735 by HMRC as “an anti-fraud measure designed to counter criminal attacks on the UK VAT system by means of sophisticated fraud.” You may be aware of the terms MTIC (Missing Trader Intra Community) or Carousel Fraud. Very simply, MTIC fraud involves goods that were initially purchased VAT free by a UK VAT-registered business from another EU member state, supplied on with VAT added to another VAT-registered business in the UK. The supplier receives payment of the VAT from the customer but goes missing before paying the collected VAT over to HMRC.
Reverse charges in the UK fall into two categories: those designed to simplify VAT compliance/reporting, and those designed to protect the revenue. The reverse charge that you are most likely to be familiar with is the one that deals in business trading across borders. This was introduced throughout the EU to make it easier for businesses by saving them from having to register for VAT in every country that they are providing business services to. The general rule for most business-to-business (B2B) services is that they are deemed to be supplied where the customer belongs. While we are not looking in detail at the place of supply here, as it's not the most relevant part to the construction industry in this topic, information on B2B services can be found in Section 6 of Notice 741A Place of Supply of Services, and paragraph 6.4 of the same notice also provides details of services falling outside of the general rule.
The specific supplies to which the domestic reverse charge applies are listed in Section 3.1 of Notice 735. Supplies of mobile phones and computer chips were affected with effect from 1st June 2007; emission allowances from November 2010; wholesale gas and electricity from 1st July 2014; wholesale telecoms from 1st February 2016; renewable energy certificates from 14th June 2019 and building and construction services which will come into effect from 1st October 2020 delayed from October 2019. The link is here. https://www.gov.uk/guidance/vat-domestic-reverse-charge-for-building-and-construction-services