HMRC and the reverse charge for the Construction Industry

After a number of deferrals, the domestic reverse charge for the construction industry finally came into effect on 1 April 2021.

What is the reverse charge?

In brief, businesses in the construction industry are now required to check whether their customers are VAT registered when supplying ‘specified services’, i.e. services subject to VAT at the standard or reduced rate which have to be reported through CIS.

Where such services are supplied to a VAT registered customer, they are subject to the reverse charge unless the customer does not make onward supplies of the building and construction services supplied to them.

HMRC have recognised that businesses affected by the change will have not found the changes to accounting software and invoicing to identify and correctly account for reverse charge supplies easy and, therefore, announced a ‘light touch’ approach to errors made in the first 6 months of the new legislation.

This means that HMRC officers may assess for errors during the light touch period but will only issue penalties if they believe that a business is deliberately taking advantage of the measure by not accounting for the reverse charge correctly.

How businesses can avoid penalties

The 6 month ‘light touch’ period expired on 30 September 2021 and businesses required to comply with the requirements could now be subject to penalties if errors in accounting for the reverse charge occur.

To avoid penalties, businesses supplying construction services should ensure they do the following:

• Check their customer has a valid VAT registration number.
• Check their customer’s CIS registration.
• Review their contracts to decide if the reverse charge will apply and inform their customers.
• Ask their customer to confirm, in writing, if they are an end user or intermediary supplier.
• Ensure accounting systems and software are correctly accounting for the reverse charge.
• Ensure all staff responsible for VAT accounting are familiar with the reverse charge and how it works.

Where possible, all of the above should be documented, as the reverse charge could put construction industry businesses in a repayment position because they are no longer accounting for VAT on their services.

HMRC routinely check repayment VAT returns before refunding the VAT and it is, therefore, important to ensure documentation is held which confirms the reverse charge has been correctly applied.

How monthly VAT return submission can help

Waiting for HMRC to approve and process a repayment can have an adverse effect on cash flow and, unfortunately, HMRC can delay making a repayment for as long as it takes for them to satisfactorily conclude their enquiries.

In order to expediate faster repayments, requesting a change to monthly VAT return submission can be helpful as it flags up to HMRC that the business is in a regular repayment position and prevents every VAT return being selected for checks.

How can Shorts help?

The Shorts Tax Team are specialists in VAT for the construction industry, with years of experience working with a diverse range of clients. If you have a question, concern or challenge relating to the reverse charge, or any other areas of VAT, we encourage you to get in touch to discuss your VAT queries.