HMRC has published ‘Draft legislation: VAT reverse charge for construction services’, which will bring in a new reverse charge for supplies between construction businesses in order to combat VAT fraud in the sector.

  • If approved, the legislation will have effect from 1 October 2019.
  • It is designed to reduce missing trader fraud in the construction sector, where VAT is not paid over to HMRC by a supplier.
  • The legislation uses the same definition for construction services as the Construction Industry Scheme (CIS) definition of construction operations.
  • The reverse charge will apply throughout the chain of supply, where the supply is of construction services to a recipient which itself is a business that will be making an onward supply of construction services.

There are excepted supplies to which the reverse charge rules will not apply:

  • It will not apply where the recipient is not going to be making an onward supply of construction services. This means that the end user/customer will not be affected, only the businesses in the middle of the chain will be affected.
  • It does not apply to services between connected parties, or between landlords and tenants.
  • Zero-rated supplies are excluded.

To effect the change, construction services are added to the reverse charge rules applicable to other Missing trader frauds under s55A Value Added Tax Act 1994. This operates differently to the normal cross-broder Reverse charge.

These rules have an effect on the calculation of turnover for VAT Registration purposes and on who is liable for the VAT payment to HMRC.

VAT Registration

  • Where the services are caught by the new rules, the recipient business is treated as making a supply to itself of the services received for VAT registration purposes. This is regardless of whether the supplier is VAT registered or not.
  • The supplier is still treated as making a taxable supply for VAT registration purposes too.
  • The first £1,000 per month of construction services from a supplier will be ignored. Only the excess is included.

These rules could result in a non-VAT registered business having a far lower effective VAT registration threshold.

If for example, a contractor pays a subcontractor £2,500 a month, £1,500 of those payments made will be treated as turnover of the payer (recipient of the services) for VAT Registration purposes. If the recipient charged the same amount with no mark up, to another contractor it would effectively have to double count £1,500 when calculating its VAT turnover. Once for the receipt of the supply and once for the supply it makes.

VAT Payment

  • Where both the supplier and the recipient are VAT registered, or should be VAT registered, the recipient is liable to account for and pay the VAT to HMRC on behalf of the supplier.
  • The supplier will not make a VAT payment on those supplies.
  • The first £1,000 per supplier per month is not ignored in this case.

The consultation closed on 20 July 2018. HMRC have not yet published feedback to the consultation. The full draft legislation, explanatory notes and, draft impact notice can be read here.


Registering for VAT

Reverse charge & missing trader fraud (MTIC)

Reverse charge & place of supply

CIS: Contractors and Subcontractors 


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