GUIDE TO THE DOMESTIC REVERSE CHARGE FOR CONSTRUCTION EMPLOYMENT BUSINESSES

Introduction – summary of the provisions

The start date for the domestic reverse charge for construction (“DRC”) is 1st October 2019.  The permission to change s55A of the VAT Act 1994 to bring in the DRC is in the 2019 Finance Act, which received royal assent on 12th February 2019.  All that remains is to give the Statutory Instrument (opens in PDF) an official number to make it an order, so it is unlikely it will be delayed beyond the expected date of 1st October.

The services included and excluded are show at sections 4 to 7 of the Statutory Instrument (as above) and are taken from the services that come under CIS, but in the case of the DRC include materials supplied with those services.  Also, if there is a supply where part comes under the DRC then the whole supply is treated under the DRC.

The DRC only applies where both the supplier and the customer are VAT registered, or required to be VAT registered, and for the purposes of the registration threshold the supplies under this reverse charge do not count towards that threshold (unlike the other goods and services which have domestic reverse charge rules).  The DRC also only applies when the supply is made to a customer who is an “intermediary supplier” – that is, they will be making an onward supply of the construction services without material alteration or further processing.  The DRC does not apply when the customer is an “end user” (see section 2 of the Statutory Instrument) – that is they will use the services supplied for any purpose other than making further supply of those services.

An employment business will not be making a supply of construction services (even if the work is to be reported under CIS), but rather of staff, unless, exceptionally, they are directing the labour with respect to the site work.  This means an employment business will have end user status and should thus ensure that supplies to them and from them are not dealt with under the DRC.

Suggested preparations for the new legislation

There will be two main areas of preparation for an employment business to be ready for the DRC coming into force:

Educating the supply chain – suggest commence in April 2019:

  • education of the supply chain will be a key issue in the preparatory time come up to 1st October 2019. Most people were anticipating that all supplies of labour into the construction industry would come under the DRC, so time will need to be spent assuring customers and suppliers that neither supplies to, nor from, an employment business will be under the DRC

We can offer support to our customers if they find difficulties in convincing parties in the supply chain of their end user status under the DRC.

Due diligence policy and review – suggest sorting this ongoing work by May 2019:

  • review due diligence policy. If you do not already have a policy, then create one.
  • ensure application of policy, starting with review of all major parties in the supply chains now and set plan to regularly revisit checks

As the DRC does not apply there will be need for increased work on due diligence along the chain of supply.  Should someone in the chain default on paying over the VAT due HMRC may well seek to ‘attack’ the employment business for the missing VAT on the grounds that they ‘knew or should have known’ that there was fraud in the chain under the principle arising from the Kittel case.  Thus, the business will need to show that their due diligence policy and application of the policy are adequate to prevent them footing the bill for fraud within the chain.

Ongoing work after 1st October 2019

Regular attention to due diligence will be needed going forwards.  It is easy to pay attention to the ‘one off crisis’ when there is new legislation in force and then not keep up that level of work going forwards.  As the supplies in this chain are now clearly in a chain where there is known to be fraud there will need to be a high level of attention to due diligence going forwards.

Regular updates

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