VAT domestic reverse charge | Exemption for employment businesses

HMRC’s VAT domestic reverse charge for construction services is finally due to come into force on 1st March 2021, after several delays.

This anti-fraud measure changes the way VAT is collected in the construction industry. It means that the customer receiving the supply of qualifying construction services will have to pay the VAT directly to HMRC, rather than paying it to the supplier.

Notice we said “qualifying construction services”. The good news is that the reverse charge will not apply to employment businesses supplying construction services. 

The distinction between supplying staff and supplying construction services is that the individual workers are employed or paid by the employment business and not by the construction business that uses them.

Indeed the HMRC guidance is pretty cut and dried on this:

“Employment businesses are treated differently for the purpose of the reverse charge. Supplies by employment businesses are not subject to the reverse charge, even if those suppliers are within the scope of CIS”. 

VAT domestic reverse charge – what is it?

The intention to introduce a domestic reverse charge for construction services was announced in 2017. It shifts responsibility for accounting for the VAT on certain “specified services” from the supplier to the recipient of the services.

The measure is intended to prevent “missing trader” VAT fraud in construction supply chains. This is where fraudsters set up shell companies to steal VAT while operating alongside legit construction firms. The reverse charge is expected to bring millions in missing VAT into the Exchequer.

Effectively it means that businesses who are caught by the domestic reverse charge will no longer charge VAT on their invoices, as the recipient business will charge themselves the VAT.

3 key points to note about the VAT domestic reverse charge

  • Only standard rated and reduced rated supplies will be affected.
  • It only applies to “specified supplies” between VAT registered businesses.
  • Employment businesses supplying construction workers won’t fall into this remit las they are unlikely to be considered a building and construction service for VAT purposes.

A win for employment businesses…

Joe Taffurelli, Head of Group Operations at Liquid Friday, welcomed the news:

“This is a real win for employment businesses and payroll providers who operate within the CIS. The confusion and lack of knowledge can now be cleared up. It is a reassuring sign that HMRC can listen to the industry and they have acknowledged that our industry would have been disproportionately affected. Liquid Friday will continue to support all of its agency partners and will remain at the forefront of compliance, protecting the supply chain.”

It is a sentiment that will be shared by many in our sector, considering the potential strain on cash flow and process changes the VAT reverse charge could present.

 With the economic impact of the pandemic, IR35 reform and the commercial uncertainties of Brexit to contend with in 2021, at least the VAT reverse charge is (in most cases) one less change for employment businesses to worry about.

However, despite the exemption it is still advisable for employment businesses to review their contractual arrangements and amend where necessary to avoid being inadvertently caught by it.

Let Joe know!

At Liquid Friday we get the latest guidance straight from the horse’s mouth (FCSA, HMRC and our retained tax and legal advisors), so if you have queries on the VAT domestic reverse charge, and how it may affect your business, please email [email protected]

This article was originally published on 11th July 2019 and updated on 9th February 2021.