With everything else that’s going on you’d probably be forgiven for missing an important change in VAT law which came into effect on 1 March this year. But if you’re a developer, an occupier or a landlord who spends money on building work you need to know about it. Called the VAT Reverse Charge it applies to a list of industries and activities that includes construction, or more specifically, what the legislation calls construction operations. That covers pretty much everything from building a bridge to painting a skirting board - and includes demolition and repair on the way. (You’ll be relieved to learn that drilling for oil and signwriting are excluded).
Designed by HMRC to stop VAT leakage from the supply chain, the new rules mean that instead of suppliers receiving VAT on top of their payments from customers, the customer pays the tax direct to the Revenue. Previously a proportion of the VAT paid down the supply chain never reached the government’s coffers because it was simply kept by suppliers to boost their takings, or what was perhaps euphemistically described as ‘lost’.
If you’re still reading you might wonder why this is important for you. On the face of it, it looks like an issue for building contractors and their suppliers, and simply involve a revised set of cash flows when invoices are paid. Besides, as a client who spends money on construction operations, you’ll most likely be an end-user, so you are exempt from the reverse charge. Typical end users would be developers, building owners or occupiers provided they are not carrying out the building work themselves. But the reason you need to know about this is because you’re only exempt if you’ve notified your suppliers.
There are some exceptions to these new rules but they are limited to situations where only a small proportion of the payment in question is for construction operations, or where suppliers are ‘intermediary ‘ which is to say a party with an interest in the development, a tenant for example, or where the supply is made to a party that is inter-company to the end user. Intermediary suppliers are exempt but like end-users must notify their suppliers.
So, if it’s just a question of notification to signify exemption, how’s that done? Helpfully HMRC has provided a form of words for end users and intermediary suppliers to use: ‘We are an end user for the purposes of section 55A VAT Act 1994 reverse charge for building and construction services. Please issue us with a normal VAT invoice, with VAT charged at the appropriate rate. We will not account for the reverse charge.’ That’s not a mandatory form although it’s important to be clear about your status with suppliers and contractors. The change of law is specific to construction expenditure, so it doesn’t apply to related costs like the professional fees of Architects or other consultants.
The main impact of this change will probably be invisible to most end users because the re-routed VAT cashflows will be happening further down the supply chain. There however, some disruption is expected as suppliers switch to the new system. HMRC has acknowledged that errors will occur as everyone finds their feet with the new rules. It’s said it will be in a forgiving mood for at least a short period.
If you’re an end-user and you’ve given the necessary notifications, you have nothing to worry about but at least you’ll understand now why your contractor’s suppliers are looking so stressed.