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Domestic VAT reverse charge on construction industry labour

06 December 2017

In the Autumn Budget 2017, the Government announced that a new VAT reverse charge - under which the recipient rather than the supplier would account for the VAT due - would be introduced on supplies of construction labour in October 2019. On 1 December 2017, HMRC published a summary of responses document from its recent consultation on the proposal, which gives some further information on how the reverse charge will be implemented:

  • The scope of the reverse charge will follow the Construction Industry Scheme definition of construction services.
  • There will be no threshold applicable to the measure and no exemption for Flat Rate Scheme users (even though they will effectively have to leave the scheme to be able to recover VAT on the costs).
  • Sales to the final customer in the chain will not be covered by the reverse charge. Respondents to the initial consultation warned that there may be particular definition issues for joint ventures and special purpose vehicles in the voluntary and public sectors so the definition of ‘the final customer’ will be subject to further consultation in Spring 2018.

Respondents also noted that the change would be significant for the industry and create costs for IT and training and possibly cash flow, and that the reverse charge will be complex for businesses with more than one VAT rate applicable to their services. Construction industry businesses now await the next round of consultation in Spring 2018.