The measure was announced at Autumn Budget 2017 and will, for certain supplies of construction services ('specified services'), mean that the customer will be liable to account to HMRC for the VAT in respect of those purchases rather than the supplier.

The legislation will not apply to specified supplies made to customers who are consumers, or to those that use specified supplies to make other supplies, such as those selling new houses. It will come into effect on 1 October 2019.

The reverse charge will apply through the supply chain up to the point where the customer receiving the supply is no longer a business that makes supplies of specified services. Also excluded from the reverse charge will be businesses that supply specified services to a connected party within a corporate group structure. In these circumstances, the supplies in question will then revert to normal VAT accounting rules.

The reverse charge will include goods where those goods are supplied with the specified services.

HMRC says the aim of the technical consultation is to test whether the scope and definitions are understood and achieve their objective, and that its estimates of the impacts are reasonable.

The introduction of a reverse charge does not change the liability of the supply of the specified services. What does change is the way in which the VAT on those supplies is accounted for. Rather than the supplier charging and accounting for the VAT, the recipient of those supplies accounts for the VAT. Section 55A of the VAT Act 1994 provides the power for the introduction of a reverse charge by means of secondary legislation.

The types of construction services covered by the reverse charge are defined in the draft secondary legislation. These are based on the definition of 'construction operations' used in the construction industry scheme (CIS) under section 74 of the Finance Act 2004.

The draft legislation excludes certain types of supplies of services, also based on CIS definitions, as well as supplies of specified services that are made to customers who are not construction businesses such as a high street retailer.

Also excluded are supplies of specified services where the supplier and customer are connected in a particular way, and for supplies between landlords and tenants. The meaning of connected is defined in the legislation and only applies where the customer is not a construction business and the supplier is part of that customer's corporate group. These exclusions are defined in the draft legislation as excepted supplies. Unlike for CIS, there will be no deemed contractor provisions whereby purchases become subject to reverse charge because the purchaser buys a certain amount of such purchases in a given period.

Where a VAT-registered business receives a supply of specified services (which are not excepted supplies) from another VAT-registered business on or after 1 October 2019, it accounts for that VAT amount through its VAT return instead of paying the VAT amount to its supplier. It will be able to reclaim that VAT amount as input tax, subject to the normal rules. The supplier will need to issue a VAT invoice that indicates the supplies are subject to the reverse charge.

HMRC says it expects an additional £90m of tax in 2019/20, rising to £135m the following tax year, £105m the year after and falling to £75m in 2022/23.

The consultation closes on 20 July.

Draft legislation: VAT reverse charge for construction services is here.

Report by Pat Sweet