New rules for VAT on construction, repair and maintenance services

From 1 October 2019 some customers will have to account for VAT chargeable on a wide range of construction, repair and maintenance services received.

The effects are likely to be felt hardest by smaller contractors, who might use the VAT they collect as working capital.

This doesn’t apply to end-users, so most housing associations, schools, property investors and developers, and those occupying property for their business, shouldn’t be affected.

Most captive design-and-build and repairs subsidiaries also shouldn’t be affected. However, there remain questions about how customers will confirm the relevant status to suppliers.

Shifting responsibility

Normally, the supplier charges VAT to the customer. However, for certain sectors susceptible to missing trader fraud (where a supplier may disappear owing a large VAT bill to HMRC) there‘s a trend to shift the responsibility for accounting for VAT onto the customer.

This is being extended to the construction sector.

Affected services

The new rules will apply to ‘construction services’, which are defined in the same way as for the Construction Industry Scheme (CIS).

Therefore, if you currently have to consider the CIS (even if you don’t have to complete CIS returns), you’ll have to consider the reverse charge for construction services in future.

It's worth noting this isn't the same definition as 'services in the course of construction' for building new homes etc. The definition is wider, and includes extension, alteration, repair, painting and decorating.

Exceptions to the rule

There are four exceptions to this requirement, which we expect will cover most situations where these services are received.

1. The customer is not using the construction services received to provide further construction services - this would cover most property owners/occupiers receiving the services in order to repair/maintain/improve their property.
2. Where the customer will use the construction services received to provide further construction services, but these will be to a connected party - so if your corporate group has a design-and-build or repairs subsidiary, which provides services only to other members of the group, this wouldn’t be required to operate the reverse charge.
3. Where the customer is a tenant providing construction services to their landlord.
4. Where the customer is a landlord providing construction services to their tenant.

Identifying exceptions

It is unclear how the parties will let each other know whether one of these four exceptions applies.

Possibilities include:

• a regime of certificates from customers to confirm that they fall within one of these exceptions
• a regime of certificates from customers to confirm that they do not fall within the exceptions and will apply the reverse charge
• some form of registration service.

Discussions are continuing with HMRC on these practical points.

If you would like to discuss this further, please contact Adam Cutler.