HMRC has published draft legislation concerning the proposed VAT Reverse Charge mechanism for construction services, due to come into effect 1 October 2019.

The measure is intended to prevent “Missing Trader Fraud” in the construction sector whereby firms disappear holding large amounts of VAT owing to HMRC. Similar VAT mechanisms already exist for other businesses e.g. mobile phones and energy supplies.

Under the new measure, construction firms will not add/collect VAT on sales to certain customers. Instead, the customer will account for the output VAT due under the Reverse Charge (or “Self-Charge”) mechanism.

Construction services/businesses caught by the new regime are typically those to which the Construction Industry Scheme (“CIS”) applies (see FA 2004 s74(2) and s74(3)). Certain supplies/services will be exempted from the changes and suppliers will charge/account for output VAT normally - these may include customers which do not “on-supply” construction services and certain supplies to intermediary customers.

The Reverse Charge will apply to the full value of the supply. So, for example, if goods are supplied with the services, the goods will also be subject to the Reverse Charge.

Businesses will need to make some changes to their VAT processes and although they will remove VAT from their invoices, these must now include a reference to the Reverse Charge applying to the customer. Unless otherwise agreed with HMRC, the amount of VAT to be accounted for under the Reverse Charge should also be clearly stated somewhere on the invoice but should not be shown as VAT charged. Full details on invoicing can be found in HMRC’s VAT Notice 735.

Businesses are encouraged to consider the new rules and take advice if they might be affected.