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VAT reverse charge construction industry

A change to the VAT rules first announced at Budget 2018, will come into effect from 1 October 2019. This change will make the supply of construction services between construction or building businesses subject to the domestic reverse charge. The reverse charge will only apply to supplies of specified construction services to other businesses in the construction sector. The introduction of this reverse charge targets fraud where VAT due to HMRC is never paid by a building subcontractor.

New guidance on the workings of the domestic reverse charge (referred to as the reverse charge) has been published by HMRC. Using the reverse charge procedure changes the usual VAT treatment such that the customer receiving the service is liable to account for the VAT due rather than the supplier. There is no cash impact for building clients affected. The main contractor will pay the subcontractor the amount of their charge excluding VAT. They will simply add the VAT reverse charge to their return and claim back the VAT amount as input VAT.

The reverse charge will affect certain specified supplies of building and construction services supplied at the standard or reduced rates that are reported under the Construction Industry Scheme (CIS). These are called specified supplies. This will place the onus for dealing with the VAT charge due on subcontractors’ bills to the main contractor.

There are now less than 4 months until the new rules come into effect and businesses that will be impacted should already be making the necessary preparations. HMRC has said that they understand that implementing the reverse charge may cause some difficulties and will apply a light touch in dealing with any errors made in the first 6 months of the new legislation, as long as you are trying to comply with the new legislation and have acted in good faith.

Cashback schemes and tax

Statement of Practice 4/97 sets out HMRC’s views on the correct treatment for tax purposes of commission, cashbacks and discounts. Cashbacks are taken to mean lump sums received by a customer as an inducement for entering into a transaction for the purchase of goods, investments or services and received as a direct consequence of having entered into that transaction.

In general, an ordinary retail customer purchasing goods, investments or services at arm’s length will not be liable to Income or Capital Gains Tax in respect of any commission, discounts or cashbacks received by them. This applies even if the commission or cash-back is paid under an enforceable contract separate from the contract for the supply of the goods or services itself.

However, if someone is paid for introducing some other customer to the supplier of goods or services, then they are taxable under the miscellaneous income sweep-up provisions if:

  • they are not otherwise chargeable; and
  • the payment is not gratuitous.

Note that a cash-back received in the course of trading is a receipt of the trade to be included in taxable trade profits.