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UK Releases Construction VAT Reverse Charge Guidance

Monday, October 5, 2020

On September 24, 2020, HM Revenue and Customs released in-depth guidance on the introduction of the VAT reverse charge mechanism on the supply of building or construction services.

The UK tax agency on September 24 released three guides: one general, in-depth guide titled "VAT Reverse Charge Technical Guide"; a guide on how to account for VAT for buyers ("How to use the VAT reverse charge if you buy building and construction services); and a guide for suppliers of building and construction services subject to the reverse charge ("How to use the VAT reverse charge if you supply building and construction services").

The new reverse charge for construction and building services is being introduced from March 1, 2021. Originally due to be in place from October 2019, the measure was previously delayed to October 2020.

Under the measure, a VAT-registered business that supplies certain construction services to another VAT-registered business for onward sale will be not be required to account for VAT, but must issue an invoice stating that the service is subject to a domestic reverse charge.

The recipient of the supply must account for the VAT due on the supply through its VAT return, instead of paying VAT to the supplier. The recipient may also recover that VAT amount as input tax, subject to the normal rules for claiming credit.

For businesses to be excluded from the reverse charge because they are end users or intermediary suppliers, they must inform their sub-contractors in writing that they are end users or intermediary suppliers.

By switching the obligation to account for VAT from the seller to the recipient, the reverse charge is intended to ensure that another trader's VAT is never passed up the supply chain, thereby eliminating the potential for the supplier to disappear without remitting the tax collected. The reverse charge has been found to be particularly effective in tackling missing trader fraud and other permutations of the scheme.

Unlike other types of reverse charge, the value of such reverse charge construction and building services will not count towards the VAT registration threshold.